tax day 2006

Well, I am just getting off my 2005 tax return, a tougher task than usual given that we actually bought and sold a few things this year, and I earned at least 50 cents of income beyond my regular Rutgers salary. April 15 is always an interesting time for tax professors, because you get to see the other side of taxes, i.e., the victim's as opposed to the perpetrator's perspective which is what we are typically exposed to. Herewith, a few random impressions:

1. You understand what they mean about complexity when you try to do your own return. Take the alternative minimum tax (AMT), for example. The AMT basically requires you to recalculate every aspect of your tax liability from scratch, but it is accompanied by a five-page set of perfectly useless instructions, and the IRS website does not even list a publication explaining how it works in understandable language. I have been teaching tax for twenty years, and I would estimate that I have perhaps a 10 percent chance of getting it right (although about a 100 percent chance of owing it, since almost every useful deduction seems to have become a "preference item" for AMT purposes). Is everyone else using Turbotax, or are they simply getting it wrong?

2. It's true what they say: the system really is stacked against the ordinary person. We sold a couple of stocks and were happy to have it taxed, for the most part, at "only" 15 percent. Yet I still can't explain to myself (let alone my class) why the money I work for is taxed at 30 percent or more and the money I sit back and watch come in gets taxed at only half that. I know all the theories--incentive, lock-in, inflation, all the rest of it--but when I see it in writing, it still seems rather odd. It's especially bad, since the same people who are hit by this unfairness are likely to be the ones who have most trouble figuring out their returns (see #1 above)--not exactly an enviable combination.

3. Lest the above seem too liberal in orientation, I am reminded every year of how simply unpleasant it is to pay taxes, of the element of compulsion that lies behind it all despite our pious proclamations about the "voluntary" tax system. This is an element that we tax professors tend to ignore in our analyses: there is a big difference between paying for something of your own volition, however good or bad it may be, and paying for because somebody else says that you have to. We ignore this, I think, less out of ignorance than because there is no real way to quantify this effect: no way to say, well, I derive ten utiles out of the Government's use of my tax dollars but it really only five or six or seven because of the displeasure associated with the mandatory payment effect. I was once on a local talk show, and a caller seem confused about the difference between things his employer took from him (like pay cuts) and things that the Government took (like tax withholding). It occurred to me that, for him, there was no difference between them: they were both things he wanted that somebody else took from him; both elaborately rationalized forms of theft.

One way to bridge the gap between scholars and taxpayers might be to spend just a little bit more time on tax forms, as opposed to statutes and regulations, in the basic tax course. I always require my students to complete a Form 1040 in the first week of classes, but after that it tends to get lost. How about a final exam in which students are given a Form 1040 and the IRS website, and told to compute the taxpayer's AMT? As long as they can't use Turbotax.