Peter Griffin, like Homer Simpson, is much smarter than people give him credit for. He’s not smart though (remember the Petercopter and the Hindenpeter?), just smarter than you’d think. One time, the local news agency gave Peter a segment on their broadcast called “You know what really grinds my gears?”. Peter used this segment as a vehicle to complain about things that bother him.
In my recent survey (which you can still participate in if you have not already) I got some feedback from someone who requested a “What Grinds My Gears” section. Turns out it was my brother’s suggestion, but it was too late, I was already thinking about what grinds my gears.
So this is what has been bothering me lately: Why are business expenses tax deductible but my personal expenses not?
Many of you work for companies in a non-financial function. Many of you further still have very little knowledge of taxes, especially in a corporate setting. Did you know that most everything a company does is a tax deduction? If they buy a car, deduction. If they give you a Blackberry, deduction. If they pay your health insurance, deduction. Buy coffee for the office, deduction. If the value of property they own goes down, deduction. But if you do any of those things yourself, you don’t get a tax deduction. Why?
Business pundits would argue that businesses get tax deductions to encourage them to make their contributions to the economy. But since consumption is 70% of the economy why are the producers getting all the tax breaks? The consumers should be getting them!
For a business to get a tax break, all they have to do is keep good records of their expenses. They can depreciate assets they purchase (like buildings and cars) to get tax breaks every year on stuff.
A counterpoint to my annoyance exists. Imagine if a business didn’t get tax write-off for every expense they incurred. They would have to pay much more in taxes which would either drive them out of business, or force them to raise prices. If they raise prices on us, the consumers, then we’re technically paying their taxes for them. So when producers get their tax break, you’re kind of getting a tax break too.
Rubbish. We’ve got hundreds of people in Washington that were elected by the people. The people don’t care about the macroeconomics of tax deductions. I understand it and I don’t care. They want what’s fair. So I have a proposal.
Make all expenses tax deductions, we only pay taxes on our own profits at the end of every year. This will either be a really stupid idea or in 50 years I’ll get the Congressional Medal of Freedom. So here’s how it works:
All businesses and families are treated the same from the IRS perspective. At the end of the year we compile an annual report, itemizing our expenses. After you subtract your expenses from your income, you pay a tax on the profit you’ve made. It would be a higher tax rate to make up for lost IRS revenue, but overall you’d probably pay less. This would force even the most irresponsible people to keep track of their finances down to the last cent, because they don’t want to have to pay more taxes than they need to. With everyone keeping such close records of our spending, we’re all much less likely to do stupid things with our money. This could introduce a new era of financial literacy in this country!
Furthermore, the effect would be to reduce the tax burden on lower income families. If they didn’t make any money, then they don’t have to pay taxes.
But there are easy holes in my plan of course. A pundit could easily say that you’re only taxing success and as such no one will strive to succeed. That’s a bunch of crap because that’s exactly what we do with businesses, and none of them seem content to break even. You could also say that giving people such a huge tax break on expenses would encourage them to spend all their money and live at or beyond their means. Well, we’ve been living beyond our means under the current system and I’m not convinced people will be incented to blow $15,000 in net family income simply because they don’t want to pay taxes on it.
The plan isn’t perfect, but it in the eyes of the public it could seem more fair. We don’t necessarily want to say businesses shouldn’t get the tax write-offs they get, just that we should get them too. Those that organize their finances are rewarded, and those that don’t make much money won’t have to pay taxes.
So my gears are ground to a halt and I need to get more grease. Help me flesh out any other holes in my plan in the comments.