Taxes Force Americans To Pay Many Ways
Those who find themselves muttering about income taxes this week will not be alone. Although perhaps one in three Americans have no tax liability, most have taxes to pay anyway: More than 140 million tax returns, representing nearly 300 million Americans, will be filed this year.
The miracle is not that Americans will collectively pay more than $1 trillion in personal income taxes this year, but that we will do so with seeming equanimity. Unlike many other countries, America is a land of law-abiding taxpayers. Why?
It certainly is not behavior that dates to the Founding Fathers. They wrote a Constitution that specifically prohibited the expansive form of contemporary federal income tax. Only after the 16th Amendment was ratified in 1913 were federal taxes beyond wages constitutional. Only after the commencement of World War II was the payment of federal income taxes the norm rather than the exception.
We do not pay taxes effortlessly. As recently as 15 years ago, a reasonably diligent taxpayer could prepare his or her own taxes by hand for all but the most complicated returns. No more. Tax returns have become the province of computer software and professional tax preparers. Preparing taxes is big business. Americans pay approximately $140 billion for tax preparation help, or $1,000 for every American family. While these figures may be skewed for large taxpayers, even returns with small incomes are costly to prepare. According to the National Society of Accountants, the average tax-preparation fee for a federal return with itemized deductions and a state return is $205, and the average fee for one with no itemized deductions is $115. Tax preparation software costs approximately $50.
For many of us, the greatest cost of the personal income tax is neither the taxes paid to the government nor the fees paid to tax preparers. Rather, it is the tedious record-keeping and disproportionate anxiety about whether all necessary documents have been properly maintained and recorded.
We have turned a nation of 300 million people into an army of unpaid amateur tax document archivists. During the second week of April we all search for misplaced documents: tax forms, charity receipts, records of various expenses. If America were a nation of tax evaders, its citizens would revel in hiding some documents from the government and inventing others. But as a nation of diligent taxpayers, we spend countless hours fretting over relevant tax documents.
Make no mistake: Taxes are profoundly costly. In addition to the transaction costs of paying income taxes, consumers are punished with economic losses from the discouragement of earning income of various types. We consumers lose approximately $1.25 in economic welfare for every $1 in federal individual income taxes we pay. We lose even more economic well-being for other federal taxes we pay, such as excise taxes on alcohol, tobacco, or gasoline. We pay our taxes fastidiously not because of a rational fear of detection. The IRS audits remarkably few returns. Partly we fear the pain of an even unlikely audit with its costs in terms of time, finances, and reputation. But most of us would pay accurately even with no threat of audit because it is part of our image of American civic responsibility. Paying income taxes is not a universal experience. Some advanced countries — such as Malaysia and Brunei — have no income taxes. The same is true of holiday destination countries such as Monaco, Andorra, the Bahamas, Bermuda, and the Cayman Islands. Yet for all of the attraction, few Americans immigrate to these countries. Indeed, given a choice, tens of millions of people around the world vote with their feet and try to enter America rather than more tax-friendly countries.
The devotion and loyalty of taxpayers to their government is unrequited. Every year, our tax system becomes more, not less, obscure and punishing. Despite consumers paying inconceivable sums to the federal treasury every year, it is never enough.
When ordinary Americans live beyond their means, disapprobation comes from every quarter, including the federal government. When our government lives beyond its means, bankrupting our children and grandchildren, we Americans avert the disapproving glance. Instead, we even elect government officials who promise to spend much more than we can possibly pay in taxes. Only in a country with a magnanimous population can such a government survive.
A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.
