When I first began preparing tax returns for my clients back in the 1970s, I was able to do so by hand, without computers. The number of pages necessary to finish even the most complicated return was minimal.
Today, computers are necessary to complete even the simplest returns. With a child being taxed at the parents' rate up to age 18, you actually have to do two, three or more returns at the same time. Couple that with the state tax returns - with their own set of rules - and you have the makings of a complicated, time-consuming mess.
The tax system is simply too complicated for most Americans - even most tax preparers - to comprehend. However, this system can be fixed. Here's how:
Get rid of the alternative minimum tax. It is not necessary. Instead, limit the state tax deduction to an agreed dollar amount.
The home interest deduction should be limited to a family's primary residence. Limit the interest write-off to a loan balance of $500,000, and disallow writing off interest on an interest-only mortgage. (In reality, that is rent; the principal is not being amortized.) Foreclosures on homes would be reduced, and property taxes would not increase as much because home prices would cease being so inflated.
Capital gains taxes on the sale of stock, property, etc., should cease immediately. Instead, impose a sales tax on all purchases and sales. The brokers and financial advisers are getting a commission, so a tax collected by the brokerage companies, remitted monthly to the government, would eliminate many pages of tax returns. The taxpayer would no longer spend time trying to locate documents for basis information, dates of purchases and reinvested dividends. In addition, it would allow the government direct access to the monies invested in the market. The government could figure out how much would be necessary to collect and set the rate at that percentage. This would be a flat tax where those who have the most money invested would pay, in dollar amounts, the largest tax.
Have the brokerage houses and banks collect and remit a tax on dividends and interest monthly to the government. Use the same tax rate as today's on these unearned incomes. This would ensure the government gets its money in a timely and correct fashion. The rich would pay more because they have more invested.
Have a net worth tax assessed each year on all individuals with more than $5 million. Couple this with an end to the estate tax, and exclude retirement accounts. This way, taxes would be collected on appreciated assets that would otherwise never be taxed at all.
State taxes would be determined by each state, and a percentage of all taxes collected by the federal government would be remitted monthly to the states. This would eliminate having to learn another set of rules for each state's taxes - and there would be no more state income tax returns to file.
There are too many different types of retirement plans to track: Roth IRAs, traditional IRAs, 401(k)s, government plans, hospital retirement plans and so on. Let's have one plan and one plan only. Set a dollar amount that can be put away for each person. The amount should be tax-deductible and later taxable when taken out at retirement.
It's nice to have education credits and deductions, but the tax system should be for collecting taxes, not social welfare. If you want to make education more accessible, make it free for those who qualify. You would get all the money back on this investment when those students entered the work force and began paying taxes.
If these suggestions were followed, the tax system would become fair, understandable and much less cumbersome. The plan would eliminate thousands of pages of tax code. It would bring the cost and time spent each year on tax returns to a minimum.
To paraphrase the insurance commercial, even a caveman would be able to prepare his own tax return.
Max Neil Highstein is a certified public accountant in Lutherville. His e-mail is firstname.lastname@example.org.