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Don't fiddle with tax deductions -- eliminate them

  • Article by: KEITH LIBBEY and EVAN THOMAS 
  • Updated: April 6, 2011 - 9:58 PM

Instead, a simple system that relies only on a tax rate and your income.


Lori Sturdevant, in her March 12 column ("The long and winding road to reform"), says that fiddling with tax expenditures (e.g., the home interest deduction) is dumb politics. She's right -- and wrong.

Tax expenditures are the deductions, credits and exemptions that make our tax system so complicated. Without them we would not have to file any tax returns. All Minnesota income taxes could be collected through withholding. Simple.

The tax law is filled with exemptions, deductions and credits, each of which adds one or more lines and lots of complications to the tax form. When you fill out your taxes online and the program keeps asking you all those questions about the number of children you have or whether you sold stock or any of hundreds of other things -- that is because of all the tax expenditures.

Every one of those tax expenditures reduces somebody's taxes. There are 89 such tax breaks listed in Minnesota's tax expenditure report. They reduce the taxes of people who do every thing from owning a home to giving money away to treating cows for tuberculosis.

 In most cases, you only get the benefit of those tax breaks if you itemize your taxes -- meaning that you fill out the really long form. Most of us don't. But that doesn't mean we aren't affected. It means we are subsidizing those who do itemize. Is that fair?

These tax breaks make the system complicated and make many of us not trust it. Much of our suspicion that the system is not fair stems from these complicated tax breaks that are only available to a few of us.

All these tax breaks make it easy to not comply -- either on purpose or by accident. The Minnesota Department of Revenue estimates that noncompliance costs us about $600 million each year. And that in turn means that we need a large staff of tax auditors to check on us and be sure we are following the rules.

And finally, all these tax breaks add up. In fact the Revenue Department has estimated that our state income tax receipts are reduced by about $4.5 billion per year because of these tax expenditures. That's a lot of money when you consider that the income tax took in all of $6.5 billion in 2010.

Most would agree that a system that is this complicated, loses this much money and has this many compliance problems needs fixing. But how?

Sturdevant is right that fiddling is dumb. If our political leaders take on these 89 tax breaks one at a time, they will get clobbered by the few of us who benefit and ignored by those who don't.

But what if you took them all on? What if we wiped out all of the exemptions, deductions and credits? What if we eliminated all tax returns?

Here is what we would get:

A radically simple system in which all taxes could be collected by withholding because the system would only need to know two things -- your income and the tax rate. Simple.

Higher compliance in a system that would be harder to screw up or avoid, with the added benefit of fewer auditors checking up on us.

Greater trust in a system where we would all know that none of us is getting a better deal than anyone else.

And, perhaps most important, a system that would either collect the same amount of money but with rates about 40 percent lower or one that would keep the current rates and collect more than 50 percent more money, or some combination.

Simpler, fairer, more trusted and less burdensome foreveryone. Not so dumb.

Keith Libbey is chairman emeritus of Fredrikson & Byron, P.A. Evan Thomas is a former editor and now contributor at Newsweek. See for how it works.

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