In this article, Simon Black informs us that the IRS is considering new technology that pre-calculates your federal income taxes.  If your actual return differs significantly from their expectations, the IRS will reject it.  However, there's more to this article than just pointing out continued IRS thuggery.  It seems to me that almost every policy change the U.S. government makes is not only wrong, it's the exact opposite of the right thing to do.  Washington's "solution" to endless wars, bailouts, a failing education system, crony capitalism, out-of-control budgets, an absurd tax code, etc. is never to fix the problem; rather, Washington simply chooses to kick the can down the road.  All roads end and so will this one. 

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In remarks to the National Press Club last week, an IRS spokesman unveiled the agency’s vision for the “look forward” model in which most of the pertinent reporting information for the average taxpayer (W2, 1099, mortgage interest etc.) would be submitted to the IRS well in advance of the individual deadline.

After a massive upgrade in technology, the IRS would be able to pre-calculate what it expects to receive in taxes and instantly reject any return that doesn’t comply with its determination.

This may work fine and well for some wage earners… but start throwing in a few investment accounts, small business income, private partnerships, etc. and things can quickly diverge from the IRS estimates.

Imagine you start a new business on the side of your usual employment this year and take an initial loss due to ancillary startup costs. This wouldn’t factor into the machine’s pre-calculations of your tax liability, so you would be immediately rejected and flagged for additional scrutiny.

Makes you want to run out and start a business, or invest your capital in someone else’s, right? Not exactly.

Deep down, I think these people simply want to try and make things more efficient. Pre-crime is not the way to go. There are a number of countries that have incredibly successful tax codes, and there are common themes in all of them:

1) Keep it short. The Baltic countries are a great example of this– the entire Estonian tax code is about 70 pages, roughly 1/1000th the size of the US tax code (which is still prone to so much interpretation). It takes about 15 minutes to fill out an Estonian return, and you can do it online. In the Maldives, it’s even easier.

2) Keep it simple. When you have a tax code that’s so complex it has given rise to a multi-billion dollar preparation industry, you have a problem. There are dozens of different forms at the IRS, and over 20 versions for the 1099 alone! This is a system that is prone to massive flaws and a great deal of contradiction.

Hong Kong is a great example of a simple system. Taxes are levied at a flat rate of 15% based on the “territorial principal” that only income derived from Hong Kong is taxed. There is no capital gains tax, no VAT, no estate tax, etc. And yet, the biggest problem the Hong Kong government faces regarding taxes is how to give away their massive surplus.

3) Keep it low. When you make it easy and painless for people to pay taxes, it removes most of the incentives for them to cheat. In Singapore, tax rates are among the lowest in the world with a maximum rate of 20%. The capital gains rate is zero. The corporate rate varies from 0% to 17% (and keeps falling).

Under these circumstances, why cheat? By keeping rates low, the government is removing any incentive to engage in complicated (and costly) tax avoidance techniques. From a cost/benefit perspective, it’s much easier to comply when rates are low.

4) Keep it friendly. Creating an adversarial relationship with taxpayers doesn’t do anyone any favors. One of the key themes of the world’s most successful tax regimes is that they do not operate like a police agency that’s out to get people. This is a massive hurdle for the IRS to overcome.

Read the rest here.