A simple income tax
By David Cay Johnston
The author is a Reuters columnist. The opinions expressed are his own.
Since at least July 1, 1943, the day income tax withholding from paychecks began to finance war and tamp down demand for consumer goods, American politicians have promised a simpler tax system.
But while politicians talked on for seven decades, the code grew ever more complex with favors for this group or that, favors that mostly benefited the rich.
One country actually has created a very simple income tax. That would be China, its income tax filing rules modeled on those of the U.S. Congress circa 1913-1942.
Until Sept. 1 Chinese workers who earned less than 2,000 yuan per month (about US$313) paid no income taxes. That is when the threshold for paying taxes was increased to 3,500 yuan (about US$548). The change removed 60 million Chinese workers from the income tax rolls and cut taxes for another 24 million.
“Under the new amendment, about 7.7 percent of wage earners will have to pay tax, down from the current 28 percent,” Wang Jianfan, deputy director of the tax policy department at the Ministry of Finance, said in announcing the changes, China Daily reported in June.
In Washington the Republican leadership has been decrying the fact that half of American households pay no income tax. Partly that is due to millions being too poor to owe income taxes, though they pay payroll, sales and other taxes. The other big factor is the $1,000 per child tax credit, sponsored by Republicans, which removed millions of middle class families from the income tax rolls.
While Americans spend billions on income tax advice and paperwork, in China there is no arduous tax preparation.
LESS THAN 1 PERCENT
Only those Chinese who make more than 120,000 yuan annually (US$18,800) even file a tax form, and that’s a small fraction of one percent of the population. In the United States married American couples must file a tax return once their income reaches $18,700, while the threshold to be in the top one percent of workers is $200,000, Social Security Administration data show.
It takes a couple of minutes to complete the Chinese form according to Lawrence Lipsher, an American accountant who has long worked in China.
Contrast this with the U.S. system with its complex rules. The vast majority of the working poor pay someone to fill out their tax returns so they can qualify for the Earned Income Tax Credit, a negative income tax that President Ronald Reagan called “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”
American taxpayers took $6.4 billion in tax deductions just for the costs of preparing their income tax in 2009, an economic drag not suffered in China.
The United States once had a very simple tax return, but that was almost a century ago when the modern income tax began. The 1913 income tax form consisted of three pages plus one page of instructions. Only those at the top paid income taxes, filling out that simple form, just as in China today.
The Chinese are in the early stages of developing an income tax. They have only the simplest enforcement mechanism. In America it is commonplace to attach explanatory statements to tax returns because people’s income situation does not always fit neatly onto a Form 1040 or all the schedules that Congress has ordered up as it has handed out tax favors galore.
FAVORS FOR THE RICH
These tax favors tend to be skewed up the income ladder. Less than half of homeowners, for example, make enough to get any savings from deducting mortgage interest. The share of people benefiting from tax breaks for retirement plans and healthcare rises with income, an upside subsidy system for the affluent. At the nonprofit, nonpartisan Tax Policy Center, Eric Toder, Len Burman, and Chris Geissler added up all of these tax breaks for 2007. The total came to $950 billion.
To give that number some perspective, for every dollar of individual income tax revenue the federal government collected that year Congress gave tax breaks worth 80 cents. While those tax breaks benefit some, they mean higher taxes for those who do not qualify and a lot of time doing paperwork.
If we dumped all the tax favors, all else being equal, we could make one of three choices. We could cut tax rates across the board. We could bring in enough money to make the perennial federal budget deficits the kind of minor concern they were before the Reagan era. Or we could exempt at least 72 percent of American workers from paying income tax, as China did until this month.
Imagine the talk in Washington if, as in China now, 92.3 percent of American workers were exempt from income tax. Imagine also how much simpler and pleasant life would be if, as with China today and America long ago, we had an income tax so simple you need not file a return unless you were highly paid and, even then, could file a return in a couple of minutes.
Then again, the Chinese are modeling their income tax system on ours. So as some in China speak of the possibility of greater democracy at some future time, one wonders whether their leaders might then model themselves after American politicians, who hand out ever more tax favors and then decry complexity and the tax rates required to make up for those favors.
Lipsher said his bet is that within a century “China will create a system as hellacious as America’s.” (Editing by Howard Goller)