Baffling Tax Code May Be Hurting Economy

The Atlanta Journal/Constitution | March 21, 2004 | Donald Ratajczak, PhD

[phil_will1]

Because I need to know the economic implications of the tax code, I have been doing my own taxes for many years. I certainly use a computer, but last year’s efforts usually help this year’s outcomes. Not much this year.

In calculating my charitable deductions, I must first determine if I had a carryover of unused deductions because contributions may have exceeded the 30 percent contribution limit, unless, of course, I am eligible for the 50 percent limit relative to adjusted gross income.

If I contribute an appreciable asset, I must know if it is the 30 percent maximum variety or the 20 percent kind.

The tax status of my investment returns depends upon my income, when I made the transaction and how long I held the asset.

And all of this changes if I fall into the dreaded alternative minimum tax category.

Some of my dividends are ordinary while others are qualified. Whether I sold an asset soon after I received its dividend also matters.

For the first time in my life, I fell into the alternative minimum tax category. I had a natural gas investment that created a preference item.

However, I had a similar investment a few years ago that did not throw me into the alternative minimum class. By the way, this generates another carry-forward of deductions that were not effectively used, to be used if I ever fall out of the AMT class.

I probably will not make another natural gas investment this year, so I may actually get to use some of the tax breaks that were supposed to stimulate exploration. But I will lose the time cost.

Aside from grouping me with half the population in screaming about the tax code, how do these observations relate to the economy?

If you follow my above discussion, you will notice that I did not know the after-tax return from my investments until I completed my tax form. Not only did the returns depend upon the natural risk of the investment, but also upon my income, how long I held the investment, and whether other income and deductions pushed me into the alternative minimum tax category.

In other words, there was tax uncertainty in determining the true return on my investment.

Obviously, such tax distortions increase the difficulty of making prudent investment decisions. The very complexit y of the tax code may be stifling economic opportunities.

Also, the time I spent to prepare my tax returns was almost three times what I spent last year. I hope I did not overlook anything or make any errors. However, I am no longer sure I can spot any errors if they occurred. Americans can use their time more fruitfully than complying with these increasingly complex tax codes.

Furthermore, I used my computer program to determine what preference item pushed me into the AMT this year when a similar gas investment did not do so a few years ago. It was the state and property taxes that I paid.

In other words, I was not able to receive full benefit for all my deductions (a consequence of the AMT) because my other taxes rose. This fails the fairness test.

To be sure, this year, with a similar adjusted gross income, I was more likely to fall into the AMT group because of differences in the basic and AMT codes. As everyone knows, the basic code has reduced marginal rates and is indexed for inflation.

What many may not know is that the AMT marginal rates have not declined, and they are not inflation-adjusted. As a result, the gap between the regular and AMT rates is narrowing.

Two years ago, 1.6 million households paid the AMT. This year it will be 3 million. In 10 years, it might be 30 million.

For these people, there has not been a tax cut.

Anyone who wants to make the current tax code permanent must be crazy. When will we get relief from this complexity and its effect on investment decisions?

Donald Ratajczak is a regents professor of economics emeritus at Georgia State University.

[patriot_wes]

"In other words, I was not able to receive full benefit for all my deductions (a consequence of the AMT) because my other taxes rose. This fails the fairness test."

since when did living in a socialist state where the prosperity of the worker is confiscated mean things would be fair? Government Theft by Deception is a huge industry employing millions of CPA's, accountants, tax attorneys & filing firms like H&R Crock - not to mention what is paid to corrupt judges like McBride. Can you imagine if all those billions of dollars when into the economy where we would be?

"Some who have not denied the necessity of power of taxation have grounded a very fierce attack against the constitution, on the language in which it is defined. It has been urged and echoed that the power "to lay and collect taxes, duties, imposts, and exercises, to pay the debts, and provide for the common defense and general welfare of the United States," amounts to an unlimited commission to exercise every power which may be alleged to be necessary, for the common defense or general welfare. No stronger labor for objections, than their stooping to such a misconstruction. Springer v. United States, 102 U.S. 586, (1865). (quoting James Madison, as to Article I, Section 8, Clause 1, in the Federalist Paper No. 41)

[ancient_geezer]

Interesting comment, for obviously the wording of the taxing does not create powers beyound those enumerated under the Constitution is very clear. Why the anti-Constititutionalist's would pretend otherwise showed a lack of intellectual integrity akin to today's Dims.

Iterestingly that same court case also made some very clear statements about the power to tax per-se imposed in accord with the Constitution Article 1 Section 8:

Hylton v. United States(1796), 3 U.S. 171

"A general power is given to Congress, to lay and collect taxes, of every kind or nature, without any restraint, except only on exports; but two rules are prescribed for their government, namely, uniformity and apportionment: Three kinds of taxes, to wit, duties, imposts, and excises by the first rule, and capitation, or other direct taxes, by the second rule. "

"the present Constitution was particularly intended to affect individuals, and not states, except in particular cases specified: And this is the leading distinction between the articles of Confederation and the present Constitution."

"Uniformity is an instant operation on individuals, without the intervention of assessments, or any regard to states,"

"[T]he DIRECT TAXES contemplated by the Constitution, are only two, to wit, A CAPITATION OR POLL TAX, simply, without regard to property, profession, or any other circumstance; and a tax on LAND."

[Bigun]

Baffling Tax Code May Be Hurting Economy

MAY be???? Good golly Miss Molly what's WRONG with these people! The proper title would read:

Baffling Tax Code May Be IS Hurting Economy

[RISU]

Thank you. I signed petition at FairTax.

At least with a sales tax the money that is collected is from those with money to spend!

[Tribune7]

ping

[unixfox]

Here's my warning to the IRS: The first time I ever have to pay the AMT will be the last time I ever file a Federal income tax return

Not a citizen eh?

Even if he wasn't a citizen he is probably more patriot than ANYBODY at the effing IRS !!

[ExSES]

Aside from grouping me with half the population in screaming about the tax code, how do these observations relate to the economy?

A rhetorical question obviously...

For those who do not know, this fellow (in addition to being a college professor) is a consultant and a regular commentator and lecturer throughout the country. He studiously avoids rendering any "Adjusted Gross Income" data but, I am certain that his AGI would be North of $300-$400K. I'll shed no tears for his economic plight!!!

There are single folks in New York and California with AGIs less than $70-$80K who are impacted far greater than the esteemed professor!

Bottomline is, the AMT is merely a "stealth tax" that ensures that anyone having even modest investment income and itemizing their deductions is "RICH" in the eyes of Congress and the IRS. As usual, a "tax the rich" amendment (widely applauded by the cheerleaders for class envy) actually taxes even lower middle-class taxpayers now!!!

[phil_will1]

"People are voluntarily leaving the income tax system."

I am afraid you are correct. A "voluntary" system such as ours depends on the support of taxpayers and a belief that it is reasonably fair. As the Code becomes more and more bloated and the inequities more glaring, that confidence is being lost. This trend can be expected to increase if we stay with this system. The more some taxpayers opt out, the more tempting that option becomes for other taxpayers.

This is one of the major reasons that I have posted on these threads that FTR (Fundamental Tax Reform)is not only possible, it is inevitable. The current system will eventually collapse of its own enormous weight. It is doubling in size and complexity every 25 years with no slowdown in sight. We can have FTR before we have a financial catastrophe in our federal revenue system, or we can do it afterward. The choice is ours.

[VRWC_minion]

People who want a flat tax should love the AMT, because its essentially a flat tax.

[phil_will1]

"Why don't we work together to get rid of the complexities?"

Many of us are already doing that. We start with the proposition that the income tax is a 90 year failed experiment and that simplicity and efficiency is impossible to achieve under such a system. Fortunately, there is a thoroughly researched alternative that would replace all 46,000 pages of the current system with a bill that currently numbers approximately 100 pages.

For more, visit www.fairtax.org

[RocketWolf]

I recently paid a CPA $180 to fill out a large number of incomprehensible forms so I could pay uncle the $5.00 I owed him. Because the IRS had furnished an incorrect EIN I got hit with a $203.16 fine for this return. This s... has to stop.

[prolusion]

Baffling Tax Code May Be Hurting Economy

Well, duh! </we're smarter than you because our tax system is more complex.>

[Protagoras]

Canuck?

[Protagoras]

Even if he wasn't a citizen he is probably more patriot than ANYBODY at the effing IRS !!

You missed my point. If he isn't a citizen, and I don't know if he is or isn't, then not filing is a mute point.

I hate the IRS FYI.

[Alberta's Child]

Not me!

[Alberta's Child]

Even if I was a Canuck, I wouldn't be a Canuck -- I'd be an Albertan. LOL.

[glorgau]

Hey, I just opened my mail and saw that the IRS wants $11K and change from me. time get and accountant - I can't figure out the AMT.

[Fledermaus]

Is this reporter just out of college? These things have been known for decades.

[phil_will1]

"Is this reporter just out of college? These things have been known for decades."

Donald Ratakczak is a regents professor of economics emeritus at Georgia State University. That means he didn't just get out of college.

Has it been known for decades that as many as 30 million people may be paying the AMT within 10 years and for them there has been no tax cut?

The inequities that he complains about are more of the same. If you were to write a book about the unfair and economically destructive aspects of the Code, it would be longer than War and Peace. That is precisely why many of us favor scrapping this system which is beyond repair and starting again with something simpler and fairer - such as the FairTax.

[Taxman]

Thanks for the ping, Geezer.

The next few months will be interesting -- my prognostication is that FTR will become and election year issue. Lotta anger out there re: IRC and IRS.

Anybody out there willing to help us make it so?