Are you responsible for paying your taxes yourself or prefer delegating this unpleasant chore to professionals? If you belong to the first camp, you’re definitely a hero! According to CNBC’s latest research, the American taxpayer devotes 12 hours to this kind of paperwork. In contrast, those who address accounting or tax preparation services should be ready to spend $230 on average for all necessary forms to be filed. In any case, isn’t now the time to put an end to this bureaucracy and follow the examples set by Europe?
In Europe, though being varied, the tax-paying procedures are much simpler and deeply automated. For instance, in Estonia, the citizens are provided with the government’s math on their taxes, and all that should be done on their side is the quick check-up. In 3 minutes, the taxpayers can end up confirming the data and sending it back to the corresponding institution with a click. The other European countries, such as Denmark, Belgium, and Spain, have a similar tax reporting system too. So, why not translate this best practice into the US legal landscape? And should we finally abandon the taxpaying skill fostering among the American citizens?
To find answers for these complicated questions, let’s look together at the blockers that prevent the US from being on the same page with Europe and then come up with conclusions. A vested interest first!
Tax Paying Statistics Are Louder than Words
What’s the current situation with taxation in the US? Look through the shortlist of statistics to get a basic understanding of what’s going on:
- Starting from 2010 and on, there’s a steady rise of state government tax revenues in the country — from $705m to $1tn. The only exception is the fiscal year of 2020 when a slight decline has occurred as the post-COVID aftermath.
- The Q1 of 2021 also proved the tendency of augmented taxes collection by the state and local governments — $438m. Compared to the previous year, this result demonstrates the ongoing growth trend.
- 50% of Americans believe that the income taxes, which is the core of the present American tax system, are too high. Not to mention the unfair distribution of taxes.
- Despite the attitude division, civic responsibility and social inclusion are at the top of the American values when it comes to the tax filing process. To be exact, 95% of the US taxpayers consider this process as a must. Thus, if there’s a real need for a tax system’s upgrade, the train of thoughts should be reprogrammed first.
Still not sure where are you standing on this matter? Go further to learn more about the US tax system sophistication!
Key Reasons For US Tax System Complexity
Hierarchy of tax regulators
The time spending on the tax filing tightly correlates with the number of forms and their detailing. In the US, you obligatory have to deal with the federal, state, and city income taxes as a minimum involvement plan. If a person lives and works in different states or has more than 1 job, the process of taxes paying becomes even more complicated. The tax regulation will change accordingly, and each authority will dictate its own policies. Can you imagine that there are 70,000 pages of rules and a deduction or credit for every separate case under the sun?
Variety of income types
The source of your income generation also leaves an imprint on the amount of taxes to be covered on the annual basis. In general, people can earn income through the following ways:
- portfolio income — from trading stocks and bonds;
- passive income — from real estate investing;
- business income — from your own project;
- earned income — from the job(s);
- interest income — from the bank;
- dividends — from the shareholding;
- capital gains — the asset sale result;
- pension — from the state.
And this list isn’t full! We’re mentioning only the taxable income types for you to see the subsequent difference in their reporting and paying. But we’re going further!
Social influence behind tax expenditures
The American tax system stems from the idea of social value and related policies as taxes are the fuel of further national education, employment, child care, and welfare support. Meanwhile, though such investment can’t be undervalued, to guarantee the future, you’re to pay for it now, and that’s the ground behind the tax expenditures. Factually, they’re the government’s aid withdrawn and delivered through the tax code, but everything gets confusing with regressive changes, complex tax forms, and household calculations instead of individual ones. For example, the taxable income of married couples is put together instead of being subdivided.
Plenty of tax code updates
Historically, taxation is a matter of politics. In the US, this phenomenon is tightly connected with the 16th Amendment, and since 1913, many presidents have brought the alterations into the tax code. Due to this constant laws update, getting to the bottom of the tax rules is notoriously hard. No surprise, many Americans aren’t willing to do the research on their own and give preference to the tax preparation services like H&R Block, Turbotax, or Jackson Hewitt. Though it’s not cheap indeed, the unloading worth it! At the same time, online services also start to bring some help. Specifically, online tax preparation is presently no-fee-based, which adds much to its quick spreading: 70% of the country’s taxpayers are already using the Free File Alliance service to shift their handwork into digital format. Why not all? The complexity of the program together with awareness deprivation, messy design, and the IRS’s supervision are normally named by 30% who remain in opposition.
Wrong tax decision-making
Another embodiment of the US tax system complexity is the push on the American citizens' decision-making. Being confused by the numerous tax reform’s backwards and forwards, the taxpayers can make even worse by agreeing to the ‘‘simplifying’’ offers. The support of the flat tax can be one of these hasty and erroneous decisions as this alternative isn’t supposed to serve right for the low- or moderate-income or other non-transparent cases. And while many continue to accuse the system’s unfairness in relation to the high-income individuals, let’s dig into it deeper!
Is Imposing Higher Taxes on Rich a Solution?
Though the American tax system is based on the principle of paying the fair share depending on the income level one earns, the attention to the real-life cases reveals its frequent violation. Or at least those who obtain substantial knowledge in handling taxes and minimizing their amount where’s possible are in favor of the situation. The richest people of 2021 are the best in that, showing the steady tendency of paying no federal income taxes and reshaping their assets into the nontaxable exceptions that will be put to taxation only at the moment of selling. As a result, only a tiny part of their real annual income is legally reported and taxed, which evokes discontent on the part of the low- and middle-income citizens who ‘‘donate’’ the significant sum from their labor income to the public funds. Just compare! The median American household pays 14% in federal taxes for the annual income of $70,000 annually, and this rate can even reach up to 37% for couples earning more than the $628,000 threshold. In contrast, the tax index among high-income American businessmen is no more than 3.4%. That reeks of foul play, isn’t it?
In this light, many believe that the system will become fairer if the rich people stop sidestepping the tax code. But is it so? As opposed to the overwhelming majority, there’s also a stance that taxing workers more than investors is rational because they’re just found at the different stages of their career leader. In other words, when the average worker will step up to the investor position, he/she will be taxed accordingly. So, maturity, experience, and hard work will work as the reward boomerang, and that’s only a matter of time.
Which point of view does resonate with you more? Willing to ponder it over a little bit more? Go on with the current situation with the US tax reform then!
The Current Scenario: Biden’s Action Plan on Tax System
We continue to speak about two opposing camps of ‘we consider the current US tax system unfair to workers’ and ‘we consider it fair.’ Who are they? Democrats are the skeptics or even resisters here, while Republicans are more tolerant and accepting with the approximate 76% vs. 38% ratio. That’s the ground why the new Biden’s tax policies are perceived differently. Democrats are wondering where the state will find seed money for investing in child care, infrastructure, or jobs and express their concerns over the future rise of taxes. They also insist on setting the taxation bar for the wealthy and corporations as means of staying afloat and go further to cap elimination on state and local tax deductions. At the same time, Republicans seem to forget the tax deficit of 2017 or remain positive for easy making up for lost. Besides, they consider the decision of imposing higher taxes on the rich or companies as a threat to the country’s competitiveness or brain and income drain to lower-tax countries.
In its turn, Biden’s action plan on tax liability presupposes the $80 billion funding for the IRS’s support to advance the customer service and strengthen the audit function over the businesses and the wealthy. Moreover, there’s also an intention to finally set the strictly defined regulation standards for the tax preparers and appoint the authority responsible for public filing assistance. Simultaneously with this, the American Rescue Plan is expected to bring important changes into the child tax credit (CTC) and earned income tax credit (EITC). According to Biden’s administration, the latter should restore the post-COVID economic landscape and stir future educational attainment. Sounds promising, until thinking about the investment source, right?
Alternatives to the Existing Tax Model: Top-3 List
We’re gradually coming to the discussion of possible options on how to modify the present-day US tax system to equally suit all. Ready? Go ahead!
#1. Flat/Single Rate Tax System
In a nutshell, a flat tax rate embodies the attempt to equalize all the taxpayers in terms of fees charged on the annual basis regardless of their income. First, it brings simplification of all the calculations and control over the tax-paying compliance. Second, this approach stimulates the unrestricted zest for earning more as the rise of your income won’t affect the fixed cost you pay as taxes. Ultimately, the positive experience of Latvia, Estonia, and Lithuania allows concluding that the system is effective to sustain the country’s economic growth. However, some critics still see the sort of unfairness even in this equity, stating the lowered expectations for the rich and the pressure on the rest as the key reason why not to implement it.
#2. Mark-to-Market Tax System
Basically, the mark-to-market system of taxes originates from the plan to tax unrealized capital gains. It implies that the tax bid fluctuates proportionally to the percent increase of the asset/stock value. On the contrary, if the loss of gain is noticed, the tax recount follows the corresponding trajectory: either deduct the loss from the taxable income or get a refund from the government. Meanwhile, even though this interplay of factors appears logical, the practical side of this tax system calls for overcoming administrative obstacles, such as the valuation of illiquid assets, lack of cash to pay the tax, or wealth consumption instead of its productive usage. Until troubleshooting these issues, the economic utility of this approach is under question.
#3. Progressive Consumption Taxes
This taxation method is centered on the maximum reduction of administrative and economic costs and is widely used in OECD countries. In brief, progressive consumption taxes are the economically favorable way to rid of double taxation and have a clearer picture of investment and consumption decisions. That’s why they’re usually seen as the financially stable source that contributes to the state’s revenue generation. Namely, the consumption taxes constituted 32.3% of tax revenues among the OECD countries in 2019. The only visible drawback is the limited scope of their application — goods or services sales only.
Any Predictions on the Future of the US Taxation?
Though none of the above-mentioned tax collection alternatives is perfect, there’s a number of factors to consider while making a choice: equity standards, easiness of control, coverage scope, administrative barriers, and economic consequences of its implementation. Which system is to your liking the most? Or do you consider the existing US tax system to be a role model? If you need consulting on adjusting your business to the US legislature and tax system in particular, drop us a line! We’re here to assist you!