Do you cheat on your taxes? Do you want to know how?
By: Kevin McLaughlin
Any discussion of taxation, and especially tax reform, wouldn't
be complete without addressing the issue of tax evasion. No one ever calls
it tax "evasion" in polite company, however. Normally it's referred to as
"compliance." But it's always there.
The actual goal in any tax system should always be to have an approach that
makes paying one's taxes relatively easy and competitively
inexpensive. But, typically, during long periods of war and external threat,
those goals have been lost and strong middle classes in great
nations throughout history have been destroyed by bad governmental policies, in
many cases related directly to taxation and over-regulation.
In other words, governments throughout history have simply worn out their most
productive citizens. That's why no single country, or system of
government has survived intact since mankind began recording history.
So how does this relate to our current circumstance in Iowa and the U.S.? Well,
as many people are already aware, there was no personal income tax
in the U.S. until the Civil War. And even that one was abolished once the war
debts had been repaid. The second appearance of a personal income tax
was in 1913 and started at the inoffensive rate of only 1%. But since that
time, and over the course of five wars, some kind of a tax has been
attached to every product, service and activity in our entire economy. And
they're big: just look at the sales tax on the purchase of a car, not
to mention your income taxes and the sneaky ones like the IRS tried to impose on
partnerships without any legislation being passed.
When the taxes and regulations get to be this imposing and burdensome, the rate
of "non-compliance" is bound to become an issue. And that brings us
to the first of the tales. It involves a successful businessman and his
successful businesswoman wife, who were about to celebrate a significant
wedding anniversary. As part of their celebration, they decided to get a very
expensive ring for her and to take a very expensive trip that was of
interest to him. The ring cost approximately $14-15,000 and the sales tax on it
would have been about $850-900 had they taken possession of it here
in Iowa. But, it would be just about as easy, and $850-900 less expensive, to
have the ring sent to the hotel at one of their destinations, and pay no sales
tax as though it had been purchased by someone out of state.
Is this wrong to do? Sure. Does it happen very often? It happens all the
time. If these people can figure it out, others can too, and in other ways. In
many cases, people who have a lot of money have gotten wealthy because they're
intelligent and may also be very hard working. In fact, "compliance" is really
a matter of degrees. In business, as an example, you can imagine someone having
lunch with a friend and mentioning insurance, or investments, or building a
building if that's what they do for a living, in order to right off the cost of
the meal. Well, to really successful people, $850-900 may be the equivalent of
mentioning insurance coverage at lunch with a friend in order to take that
expense as a deduction. And who's to say that people who evade don't feel
justified
because of the way governments typically mishandle money?
But so much for that story. The second one is more clever.
In speaking with another man the subject of business mileage came up. This man
drives a very expensive imported luxury car. It turns out that the
miles being deducted were always in the range of 22,000 annually, even though
this man almost never left town on business and traveled very
little related to his work within the city. His actual total mileage per year
was probably closer to 6,000 miles. He explained that his car was
leased and that he turned it in every three years for a new one. If he was ever
to be audited, he figured that the car would have been gone for
at least three, or more years in someone else's possession. In fact, it could
have changed hands a second time before a tax audit came about.
And, in order to catch him, the IRS would first have to find the car in a nation
of what, 80 million passenger vehicles, before they ever got the
chance to discuss business mileage.
The point is two-fold. First, that any taxes imposed need to be simple so that
it's easy for everyone to comply. Simplicity sells everything from
switchblades to swing sets, and it will help keep Iowans from moving to other
states while attracting new residents to our own. And secondly,
rates have to be competitively low to further attract the people and businesses
a state wants to have. Forget either of these principles and
you have what Iowa has today: your own residents relocating and virtually no one
outside the state considering it for the purposes of relocation.
All this has, believe it, or not, brought us to the very foundation of free
market capitalism and Representative Kent Kramer's quest:
Transparency for everyone who pays taxes in Iowa.
"Transparency" is the term used so often to characterize a tax system, or
anything else, that is easy to negotiate and treats everybody in the same
way. I like to use the example of buying toothpaste at Wal-Mart. It's
something everybody uses and for which everyone pays the same price. And
yet, the poor never stand out in front of a Wal-Mart protesting that President
Bush is getting the very same product at the very same price as
the person working for an hourly wage. And the reason is because nobody cares.
Everyone knows what everyone else is paying, unlike our tax system
which breeds distrust, and so everybody accepts it.
If you apply the same principle to Iowa's income taxes, you get the same result
with two added benefits. The first is that you can charge one
price and, if it's competitively discounted below the rates in surrounding
states, then your tax system becomes a dynamic engine for economic growth.
The second benefit for those who believe that the rich should pay more, is that
the discounted rate is automatically progressive. That's right. The
person making $350,000.00 will pay 10 X the amount of tax paid by the person
making $35,000.00 per year. And no one will gripe because everyone
will know what everyone else is paying. The poorest in society will be taken
completely off the tax rolls, if Iowa's legislators do it right the
first time.
But before we get off this subject of "transparency," remember that it means
that everyone else can see what you are doing , too. And this is
important because, as a doctor pointed out, the purpose of keeping the tax
system simple is also to keep people from cheating. When a system is
complicated, it's easier to cheat. When the system is transparent, it's very
difficult. And that's one important reason why "compliance" goes up
when the system is simple. It's a lot easier to catch the "non-compliant."
In conclusion, legislators need to keep in mind, especially if they're
interested in helping the poor pay less, or in making the rich pay more,
that "transparency" helps everyone. The poor have an easier and less expensive
time because they won't have to have anyone fill out their taxes
for them, and, with their new discount, they'll keep even more of what they
make. The "rich" will automatically pay more than the poor, but will
probably consider their ability to take advantage of their discount a bargain.
This approach also keeps your most industrious citizens hard at
work, which benefits everyone, instead of having them compile tax information.
And, with the transparency and discounting, the governments
collect more because "compliance" goes up. But the cost of government also goes
down because there's no need for large departments of revenue
with armies of auditors.
Remember that this is not about being a Republican, or a Democrat. Transparency
and discounting benefit everyone. Support transparency and
discounting.
BE AN IOWAN TODAY!