Let’s Talk Taxes!
Death and taxes. Both are inevitable and nobody much likes either one. Especially taxes. The system is naturally inefficient and more than a few people of all political persuasions can’t help but think that some if not all of that money is just vanishing into thin air.
Fortunately, there are a few out there working to reform the Byzantine mess that is the IRS and the U.S. tax code. One of those brave souls is Annette Nellen. Annette is a professor at San Jose State University and has been on so many boards and received so many awards in the area of taxation and accounting that it would take all the space in this article to list them all. Her most recent article that made a wave or two in tax land advocates for getting rid of the standard April 15 due date.
This in part has to do with the previously mentioned inefficiency of the current system. Given that all of your tax data is collected digitally and then digitally deposited in your account, why do you have to deal with a bunch of cumbersome paper forms, or digital forms that duplicate them, and then send in your tax return, most likely digitally. Wouldn’t it be a lot easier for most people if the IRS just sent you your return? No forms, no waiting, not glitches that lose your return in the mail, they just calculate what you owe and send it to you. Unless you are self-employed or make a lot of charitable donations this system should work very well.
Some object that they really don’t trust the IRS will their data. The truth is though that they have it already. That’s precisely why the direct return would work. However, Annette has some ideas that would make the situation more palatable.
First and foremost, all of your data would go into your own unique cloud. This would work whether you work at Starbucks or run a public benefit data management and protection company. That way, you could sync different incomes, donations, accounts, and the software to process it all in one place. The big benefit would be that you could even set the system to process a return for you on your own timetable. It wouldn’t change the total, just when you get it. Or, a person could adjust their various exemptions on the fly if they want to tweak their taxes so that they are only ever paying in exactly what they are required to, eliminating the need for a return at all.
This could be especially beneficial for those who are self-employed. One of the hazards of working for yourself is hoping you don’t wind up owing a massive amount at the end of the year. Many just set aside money out of their income for that specific purpose. The system Annette proposes would allow the self-employed to pay throughout the year.
This brings up a question, if this would work so well, what is the real hold up? In a word – technology. Not that the technology doesn’t exist. Rather, the IRS and government in general doesn’t have it yet. Government agencies tend to lag very far behind in the technology department. There are a lot of reasons for that, but you can also be sure that it will change in the years to come. As the professor observes, the generation currently in college is growing up largely technology dependent. They live in a world where people don’t use cash, or even a card, they just pay with their phones and call it a day. As they move up the ranks in the private and public sector, the need for the technology even in the most backward of government warehouses will need to catch up.
All of this is just the beginning of course. There are a lot of issues with our current system and many things that could be done to reform it. Until then, make sure your taxes are in on time.
What are your taxes worth?
Alexander McCaig (00:00):
Hello everyone. Welcome back to TARTLE Cast. It is May 17, Tax Day. Serendipitously, we have one of the finest tax minds in the world on our podcast with us to discuss the inefficiencies of our current system and why it is lagging so far behind and why it needs to reform itself to where technology currently is today. Her name is Annette Nellen. She's currently located in California. Her background is enormous, so we'll be more than happy to put that in the show notes for everybody. But Annette, thank you so much for joining us.
Annette Nellen (00:43):
My pleasure. Thanks for having me.
Alexander McCaig (00:46):
Are you kidding me? How could we not have you on here? [crosstalk 00:00:48] Like I was telling you before the show, I've never been so excited to talk about taxes. First of all, I don't like paying them. That's just my personal thing. One, because I know the system's naturally inefficient. So it's like, why do I want to pump money into something inefficient? And then over here, you write something in the hill on this op-ed and it's titled, let's say goodbye to April 15th due date. So here's what's interesting, you're talking about these inefficiencies. You talk about the gains we've had in technology. We have these beautiful, very efficient flywheels going on, but the IRS still seems to be using this like a Flintstones giant stone wheel that they're trying to push. I'm trying to line up my dates with planetary alignment and stuff like that. It only happens once every 3000 years or something. Tell me about the Genesis of this for you, and why you felt it was so necessary to speak about the specific inefficiency and why the eradication of one solid date itself would be beneficial to us with our taxes.
Annette Nellen (01:55):
Well, I guess I've thinking about it for some time. Talking about it for at least three years now. I guess what really kind of hit me was for my job, I'm a professor at San Jose State University, my paycheck, like many people is just automatically deposited to a bank account every time. There's a digital file there. At the end of the year I am mailed or I guess I can go on and download a copy of my W-2, which I then have to enter into the tax prep software. This is really crazy because the digital file should just, I describe it as let's just have all these digital files feed into my tax cloud. I think that's part of the concern over the years. The IRS has all this data, why don't they just prepare the return for you? Which for probably a little over half of individuals who primarily just have a W-2, maybe a 1099, that would work fine.
Annette Nellen (02:54):
A W-4 when their take job, they can indicate how many children they have, the age. They can log into an IRS platform and get that information to know what their dependent credit and child credit amounts are. Some concerns over the years have been, well we don't trust the IRS, but there was a report written by the GAO back in 1996 where they said, in other countries people... the government just prepares the return and tells you about it. Or some places, even the employer. Or you just have withholding at the source of everything and it's just all taken care. One of the things they said why it might not work in the U.S. 1996 was, well, not everybody trusts the IRS. Which I don't see any reason not to trust the IRS. They're very competent people working, they have enough people working there, and they have data. They are going to do anything awful with your data. They've got very strict rules even about... they can't disclose anybody's data or they lose their job. It's very strictly enforced, but [crosstalk 00:04:01]
Alexander McCaig (04:00):
All they're going do is send you a bill. They don't even call your phone. [crosstalk 00:04:05] talk about that data. First of all, you understand the aspects of data. You have a certification for cryptocurrencies. You're essentially an expert in that. It's very helpful for the tax sense, right? Things become decentralized. It's like you have a centralized authority, if they start just doling out people's information, they're going to have more of a political and social uprising that they can't even deal with. I mean, you're already asking people to pay money into something that they thought they've already paid money into. How you're going to use their information? Wouldn't work well for the IRS. That's an unreasonable way to look at it.
Alexander McCaig (04:40):
In a world where systems are becoming trustless because of the technology, how does that add up station then work for the IRS? If it's not from a, this 1997, 1996, essentially survey that has gone out because it's just a function of trust they speak of, and it wouldn't work in the U.S. well, that's not the case anymore. It's no longer so much of a social or political, there's technology that solves that issue. So why isn't that not adopted?
Annette Nellen (05:05):
It is puzzling because all that data could just go into your personal cloud so that you do control it because you might say, "That data might be useful to some company is going to help me with my financial planning or see if I'm getting enough money into my IRA or saving enough for retirement that I choose, and I'm going to help them help me." And I've got all this income data that's fed into this cloud. Because then you could also identify, well, here's the tax prep software that I want to pull the data out of my cloud, file my return and just be done with it. But at that point, it could be done on a daily or weekly basis. Even if you own a business, if you set up your bookkeeping correctly, like even your QuickBooks or whatever software you're using, where it's saying, yes, just put my revenue when I pay... when I've collected it, because I'm a cash by the taxpayer. Just that I send a bill, don't put that into revenue because I... Cash method, I only report revenue when I'm paid.
Annette Nellen (06:06):
I can even set it up because even when I worked for a third party, I was always depositing it right into my bank account. Becoming far more common. Certainly after when the pandemic started moreso there were some companies that were still mail a check to the people they owed money to. I think that's less common today. They want it into the bank account, meaning there's a digital file there. But you all know there's plenty of ways that technology could do this. For instance technology we're talking about is probably in the 1980s and '90s, it's not all that amazing at, oh, we can have a payment either deposited to your account. But you would identify what's the tax prep software to gather all of that. If you're paid weekly, you're paid monthly, you have other deposits or expenses going out that you've all programmed.
Annette Nellen (07:00):
Yes, for my business I'm just putting in the ones that I know are deductible. It could capture all that even on a daily basis. You can have a app that... Just like people have banking apps and even investing apps and all that that you check on a daily basis, this is how much I've earned this year and I owe this much tax. Because you can do it based on the... The app knows I have a child. Those qualifies the child tax credit. You can know on a daily basis, I haven't paid enough in. I'll just swipe and have my bank account transfer some amount in. Maybe the IRS and Congress will have a rule. Well, you have to at least come through at the end of the month or something, or you end up a quarter. But again, you could program your tax prep software to do that. I think we'll have it programmed with some state agencies just automatically makes your estimated tax payments. You have it set up, and it's done.
Alexander McCaig (07:59):
That way you're not dealing with some... A lot of people forget, people that run their own businesses, they're like, "Oh my God, I get this huge tax bill at the end of the year." What you speak about, we have created for the world, essentially your own personal data clouds, which you can share and you can monetize or do whatever you would like to do with. When you talk about this, this is all be quite possible, the question is, is it probable that the government chooses to adopt a method like that? What I'd like to ask then, what data from your own stance of your professional background in the past has shown you this sort of path of inefficiency with their processes lagging behind and how essentially... It is if forced the tax systems itself and tax law to lag also. Which is the driver here for how we look at taxes and how they begin to evolve?
Alexander McCaig (08:55):
Is it the technology and the data and the processes of the IRS? Or is it how everyone else is looking at it? Because I know that when cryptocurrencies came out, that changed dramatically, how they had to look at taxes. Because who's really in control? What's the real ownership? If it's decentralized and there's multiple nodes supporting it, does anyone person truly hold that thing? And then you have to ask for self-reporting? So what data could you tell me actually is saying, this is the leading cause that creates this change, and this lagging thing is actually having these sort of effects for everybody else?
Annette Nellen (09:30):
That's a good question. I think that the lagging effects are a few things. The IRS has very old technology. I don't know if it's annually or every other year, but the GAO does report on which government agencies have the oldest technology. IRS and the Department of Defense rate up there with some of the things being over 50 years old, and they still run a lot of things on the mainframe where they need to get folks that even understand the old programming. That's what these are. They do a slightly more modern technology as well, but is it all working together? Also, I think there's too much of a thought process on everything has to be tied to a form. I always keep on making the analogy, I have to deal with my... with tax practitioners. I've heard sometimes a tax practitioner says, "I'm using modern technology."
Annette Nellen (10:17):
If I want to have a scanner, I'm like, "Well, no. We can go beyond that." Technology does a lot more. Think about when you order from Amazon or some other company, you're not actually filling out an order form. Years ago, before we had e-commerce, if you were going to order at a catalog, you filled out an order form and you mailed it in. You don't do that. So why are we so tied still to the form? Why not have it just take this data as it's being generated, gather it and just you'll know what your tax situation is for income tax purposes at any point in time. I think it's many stakeholders that all have to adapt to what's there. In that 1996 GAO report where they said, a lot of the public doesn't trust the IRS, I'm not sure that was really true then as to what they don't trust. I think a lot of it really ties to really, I don't know anything about taxes. It's all very confusing.
Annette Nellen (11:14):
Many people actually do trust the IRS that they shouldn't be doing these things. When a lot of people would say, "Well, why aren't they just sending me a notice of what I owe or don't owe?" But I think gen Z, the people currently in high school and college, they have grown up really tech-dependent. They aren't expecting necessarily, I have to go every day out to my physical mailbox and get mail. I mean, their view is if it's important, it would have shown up on my phone somehow. They know that the technology can do more of this. They do everything online. Plus I know... The college campus, when we're actually physically together, if you're waiting a line at the Starbucks, the only people really pulling cash out of a wallet are the older people, the faculty and the employees.
Alexander McCaig (12:07):
Annette Nellen (12:09):
Or even a bake sale. [crosstalk 00:12:15].
Alexander McCaig (12:16):
Tell you, I haven't... I'd rather Venmo. I don't carry cash. If I were to throw a kegger right now on a college campus, I'd be like, well, Venmo every time you walk in, here's my QR code from my crypto currency that pays for the kegger. That's how that work.
Annette Nellen (12:34):
There's far more digital transactions, which means there's data there. I think we will get to the point where, there just be less cash being used. Now, some might say, we'll go... If someone wants to be a bad actor, yet cash still helps because it's easier to hide. Someone says, "I'm going to do some work at your house, but paying in cash." Well, we never know if that really is going to get reported. Hopefully, it is getting reported. But I think they're going to find more folks will say, I think like some of my students, "I don't have any cash." Or, "I'm sorry, what's cash? What do you mean?" I mean [crosstalk 00:13:12]-
Alexander McCaig (13:12):
Annette Nellen (13:13):
... money. It's going to [crosstalk 00:13:15] towards this. But that just means there's more [crosstalk 00:13:21] transactions. And-
Alexander McCaig (13:25):
The digital transactions have a better track record than the cash itself. Even for crypto, you get all these articles that come out in the mainstream that say, terrorists or they're going to move into Bitcoin. That's crap. You can trace back, all the way back, there's a reason why it's a blockchain, because you can see where it comes from in the ledger. There was cash, it could be going anywhere.
Annette Nellen (13:47):
The government, when they're concerned about these transactions, IRS clearly concerned, they do contract with third parties that will get in and really do some study into the blockchain. Because also the way Bitcoin and some other currencies work, if I happened to have... in my wallet, if I had 10 Bitcoin, it was all in one code. If I was going to use even-
Alexander McCaig (14:10):
That wouldn't be-
Annette Nellen (14:12):
... a half of a Bitcoin, it would pull the whole thing out of the wallet. Then it would be, it's not like it's just going to pull out half so no one knows I actually have 10 Bitcoins. It's going to pull that whole if it's all in one code. It's going to pull it all out and give me change, which that means it's on the blockchain and someone knows, hey, somebody they're actually at 10 Bitcoin. I mean, it's not as anonymous as some people might think as some of the tools that some bad actors will use to try and hide those transactions.
Annette Nellen (14:40):
I think the reality is you always going to have some bad actors on something, but I think things certainly will change in that you're going to see more businesses not having this issue of, well, I get a lot of cash. I'm a restaurant, I get a lot of cash credit cards. I like to think that most people do properly report everything. Yes. Some don't. That's been known for decades and it's mainly cash businesses where not everything is known. The bad record keepers there think maybe they're entitled to say, "Well, I don't have to report all of that, the cash, I just won't let nobody to know about it."
Annette Nellen (15:20):
But even there, a good auditor can go and figure out, well, you bought this many supplies and you... what did you do with it? Did you end up throwing it out? Because it looks like you bought enough supplies for 100 meals, but you're telling me you only sold 60 meals. Something's wrong here. They watch your restaurant for a week to see what's the typical flow, or there's data on for restaurants, what percentage of customers pay by credit card versus cash, and you get some kind of estimate there.
Annette Nellen (15:50):
That's not new that the IRS good... well trained auditors accountants. Same with FBI, if they want to figure something out, they've got forensic accountants, they can go and do all of that. One of the thing that I think also highlights, and we see this announcement, I noted it in the op-ed about every early April, IRS sends a news release out, which of course, most people don't read a news release. It's on their website and maybe some newspaper that I get them emailed to me automatically where it says, the way it works, you file your return. It's open for three year statute limitation where you might go in and amend it. Or the government might come in and audit it.
Annette Nellen (16:36):
Well, if you don't file a return... Some people don't. They don't know they have... They look at the IRS website, I don't make enough to file, that they forget that they had withholding. The only way to get it withholding back is to file the return. That expires after three years. The IRS will post an announcement, which I think the last one was, "Hey, we have over a million people that are owed $1.3 billion that if you don't file on May 17th, your 2017 return, which was due April, 2018, so three years takes us to 2021, you're going to lose your refund." That's crazy given the technology today. They know who those people are because they had... somebody withheld from them. It's just to get a paycheck.
Annette Nellen (17:20):
And then some student who didn't know, I have to file a return, because you go to the website, if you don't read the whole thing, because at the bottom, I think it does say somewhere, "Hey, even if you don't make enough to file a return, if you have withholding, you have to file to get it back." Why do people use that money when the IRS on a better technology system just would have said, when you checked to confirm what's your tax.. income tax liability was at the end of April, it turns out that you're way over paid. Do you want to leave it there? Or do you want to transfer it to your bank account? One swipe on the app moves it to your bank account, or whatever you want to do.
Annette Nellen (18:00):
But we know the technology exists for that because we see it. Some combination of banking and investing activity, do online shopping. We know technology can do a lot of these things. My reference to... well, it's your cloud, your data, you can identify all that you want to have in there. Maybe you go to, I need to do some estate planning. I want to know... Write down where my assets are going go upon my death. Well, you find an attorney and you say, "Well, hey, everything's in my tax cloud. I've got all my assets tied in there very securely." I've identified what security is there. Here security is certainly a concern. In many areas, not just in the tax field. But I think that's what I would want and emphasize, it's your tax clock.
Annette Nellen (18:51):
Because certainly there are people, "I don't want the IRS to control cloud of information there." There's no need for them to do that. But those are, I think a lot of efficiencies by just recognizing there are so many digital files that are relevant to your tax. Why not just use them in a more efficient way so far as you don't have to worry about, oh my gosh, April 15th. Then you would know on a regular basis through the app, which... The IRS can give some guidelines, "Hey, this is..." If you design your app this way, we will trust that it has all the data you really need to get you a right picture. You hire the third party that's going to help make all this happen because we obviously have companies, and... Intuit and others. That's another concern, whatever comes up about should the IRS just prepare your return.
Annette Nellen (19:46):
They can't fully do that. If someone's self-employed, they don't have all the information about expenses. But for many individuals over half, apparently it's primarily wage data where the IRS does get the W-2 from the employer at the end of the year. They can figure out through the asking you or a form, how many kids you have and all of that to figure out your return. They might just then send it to you. But the political wind on this for years has been, "No, we're not going to do that." In fact, Congressmen Kemp, back when he was chairing the House Ways and Means committee... I know he was chairing it something around 2000 to 2004, '14, 2010, 2014, he had a proposal for tax reform. It was the Tax Reform Act of 2014. Then [inaudible 00:20:39] was the HR one.
Annette Nellen (20:43):
He had a statement there, and there will be no pre-populated returns. Say, that the IRS would not do this. Which is really just like that's crazy. That's what the technology is. I say, I think gen Z, they're so tech-dependent, and they know where all this data is, their view is, "Why am I doing that? Oh, this one, the IRS has the information. I think that's more their view. I think it's kind of old fashioned that, nobody trusts the IRS. I don't see any reason not to trust the IRS. I did work for the IRS as an auditor in 1987. Very competent people. Are their technologies as modern as they could be? No. Many have limited funding. It's not to keep the old system running on all of that, but there really are a lot of efficiencies with better use of technology.
Annette Nellen (21:35):
Because another one is think of all the companies, banks, employers that have to mail their customer or their employee that tax form at the end of the year. That's a lot of postage that adds up there. Plus just printing the paper. Now, in some areas, Congress has said, well, if you do this, you can actually tell if they agree to it. The person you have to send it to can say, "You can send it to me electronically." But I don't think that's true for all of the forms. So you still have to send them off to the IRS. If you're, I think above 250 forms, you're going to have to electronically send that to the IRS. The IRS doesn't want to have all those pieces of paper.
Annette Nellen (22:18):
But with all of that there, can we even get to the point of, let's not even have the paper? The IRS could form its own cloud saying, "Hey employer, when you told the net that her paycheck just got into her account, which had that form that says how much was holding there wasn't all that, that goes into our cloud as well." You don't need to gather that at the end of the year and send all the separate form as long as you have your technology set up. That's where the law could be saying, hey, here's the guidelines. The software has to have these security protocols that if it's doing all these things, then we're assured it's working correctly and that's fine. Audit would be, they would just randomly audit folks to say, "Yes, are you actually doing this correctly?" Or they go into the restaurant and find out, "Hey restaurant, you said that everything you were doing was a digital transaction, but we're sitting here watching you and there's people coming in paying cash. How do you get those into the system?"
Annette Nellen (23:21):
I think it's just a different thinking. I think gen Z is going to... and the ones... the generations behind them, why isn't this happening? Why do we still have waiting in... a form be mailed to me, when... Can I just have a digital file? Why can't I know this throughout the year? Now some people... Okay. Just so many, many assets as you backed us information return, if the payers could say, "Hey, I got my system set up every time I tell somebody, here's your paycheck, or here you earned this much interest in the bank this month, or here's what your stock transactions were for the year, instead of reporting it at this one time, at the end of the year, where if you get something wrong on it, you got penalties, if I know I've got my systems set up within congressional IRS guidelines that they set so I know it's working, I don't have to be mailing those forms at the end of the year. Because the data's just already there. Why am I gathering at the end of the year when everybody has access to it? They can do what they need to do with it. So...
Alexander McCaig (24:31):
If you think about it, you've seen the superhighways in China. I use this analogy the other day off air with somebody else. It's like a lot of our systems have all these individuals owning their own cars. They're using the internet, and they can come in from all these different angles. But then at one moment to get into the city, to get into this centralized machine that they need to be a part of, they force 15 lanes down to 2. Well, what do you think is going to happen when you have everybody in the mother earth rushing in for one specific date, and they're carrying all this information? It's going to create a problem. But when you look at the data, data can roll. It's flexible. My mail is also going to be dependent on the mail personnel that has to bring it there.
Alexander McCaig (25:14):
And then I have to have a piece of paper. I know that I can copy data over and over and over and over again in that piece of paper that will deteriorate with time. But I can always spin up new servers without having to cut down trees. You think about the efficiency just in that, in having these things continue to roll, I don't mind if you have some day where it has to end so we can finalize liability. That is obvious. But there's no reason you can't build up to that point ahead of time and already have everything collected rather than trying to collect all of those automobiles or people or paperwork all at once.
Annette Nellen (25:47):
That's right. That's right. Even just at the paper, think of how many times we'll get something from our credit card or the bank. Do you want us to stop mailing you statements? They've been doing that for years, right? They don't want to mail you a bank statement every month. Yes, there are, I think it's now like less than 10% of individuals that actually don't use the internet, but that's going to continue to go down. But certainly the IRS could still find some way to help those individuals. You're [crosstalk 00:26:19]
Alexander McCaig (26:20):
We'll call them the form needs. Those are the ones that like the forms, you know what I mean?
Annette Nellen (26:26):
Well, I think some people-
Alexander McCaig (26:28):
I wanted to ask a question on that. Let's say a magic wand was waived, and you were put in charge of the IRS. One of the things that we do at TARTLE is we support not-for-profits for government and corporate transparency. I know perception's reality, and I know most Americans, like you had said earlier, don't understand. What would be some of the things besides, I know you mentioned an app that would create transparency, tax cloud that would create transparency. What are some other things that you would do if you were in charge of the IRS for transparency?
Annette Nellen (27:01):
... Well, a reservation there because that's been another big push of mine. There's principles of good tax policy, which is something I've been focused on for over 20 years and trying to help, I think my blog. Can we have a tax system that best meets this principles, a good tax policy and reflects the way we live and do business today. It's like this live and do business today is... we should have far greater use of technology and not be so form-driven or paper-driven. But transparency, which is a principle of good tax, for transparency and accountability, that people should understand how taxes work and the effect on them, where most people don't really understand it. The reason why... like in your K-12 education, you probably never heard anything about taxes. I think people's first exposure to taxes is that first paycheck where they're thinking, I make $10 an hour, I work 10 hours. I'm getting 100 dollars. Only to find that paycheck is like-
Alexander McCaig (28:05):
Annette Nellen (28:05):
... oh my Gosh. That's a poor way to learn about the tax system. You think about civics classes in California, I think at least 8th grade and 11th or 12th grade you have to have civics class. What about the three branches of government and how a bill becomes a law. They will never mention anything about how it's funded, as well as no discussion of your role and responsibility as a taxpayer. I mean, even asked a group of college students, and maybe some of them aren't working, how would you pay taxes? Well, the people who weren't working, they don't raise their hand. I'm like, "Of course you pay taxes. The textbook sitting right in front of you, you paid sales tax when you bought that. You put gas in your car, you pay taxes directly, indirectly." But it's way unfortunate that people don't understand that.
Annette Nellen (28:54):
I think the IRS can help play a role in that. But actually they have a website that they have for some time geared to teachers and students like high school or junior high. It hasn't been updated since 2014. At one point they had some funding for it. But it would be one way to get that information out. Plus in math classes, I actually got a couple of reports recently where I had the opportunity to present this to the tax agency in California Franchise Tax Board, as well as, I just recently I did have some presentations on this idea to some IRS staff and some rational staff as well about how can we help people better understand the tax system? If the IRS could get the funding to update that webpage, because it's really done very well.
Annette Nellen (29:46):
It pushes out lesson plans and that 2014 laws, not what we should be learning today. Also, it's sending a message of maybe it's not that important. But people really need to have better understanding of taxes. It's too much of a mystery. People should know where they're paying taxes, that transparency and accountability to taxpayers. They should also understand why are we making certain changes. Another part of transparency I would push, and I'm not sure what government agency would do it, would be, why can't we see on your tax return, your tax filing, where you're getting all these tax breaks? It shows some of your deductions, but there are things called exclusions, where something that's really income doesn't even show up on your tax return. The largest one in our tax system is the exclusion for employer-provided health insurance.
Annette Nellen (30:43):
It would not be unusual for a full-time person, working for a company that's providing... even paying part of your health insurance. That that benefit might be 5000 to maybe close to 20,000 a year. Maybe even more. That is tax-free income to the employee deductible by the employer. Yet we don't know about it at all. No one knows, if I had $10,000 of this income, instead of getting the cash income wages, my employer said, "We're paying towards your health insurance. You're paying part of it, we're paying part of it. That's not taxable to you." Well, if you're in a 20% tax bracket, you've saved $2,000, but you're not seeing that. Instead you're seeing the things like, oh, somebody claimed better income tax credit. I can see the line on their return for that, or the child credit, or their mortgage deduction.
Annette Nellen (31:34):
If we could see... and again, your tax prep software, if the government said, "Hey, you need to see this information." The tax prep software would be adjusted so that it would show you this. I was even proposing, still I'm proposing as long as we're thinking about forms, and I use forms in the context of, that's how we think today, but it will all be built into your software, of listing how much did you get from your employer for that health insurance? What fringe benefits did your employer give you that weren't taxable? What is your tax savings from having donated money to charity or taking a mortgage interest deduction? Because I think if people saw that they better understand their situation. I mean, you can see people, I hate to say this, but there are people who say, "Low-income people getting these tax breaks." Often they are much lower than the tax breaks that high-income people are getting. If somebody-
Alexander McCaig (32:29):
Annette Nellen (32:30):
... has the maximum deductible mortgage, today it's $750,000. You have to have a lot of income to qualify for a $750,000 mortgage. You might think, well, who even needs your... where you're located in the country, you're thinking, who needs that? But then you said you're from the Bay Area. [crosstalk 00:32:46] so then high income to qualify for that. If they actually have that, so they're high income, they're probably saving $11,000 in taxes. That's more than what the highest earned income credit could be. We don't know that. We're not saying, "Hey, look at that tax break you're taking, we're subsidizing your mortgage to 11,000." There's data out there that's been done by academics and others to say the benefit that anybody gets from the mortgage interest deduction is really they can buy a more expensive home. It doesn't change-
Alexander McCaig (33:21):
Annette Nellen (33:21):
... ownership rates in the U.S. are the same as in Canada and UK where they don't have those tax breaks. But if you really looked at all those or G capital gains are taxed at a much lower rate than regular income. Very high income, most of their income is capital gain income. So instead of getting taxed at 37%, it's getting taxed at 23.8. Well, that savings is far more than you're getting. If a wealthy person... And I use his example, Jeff Bezos. We've even seen in news lately about how Bill Gates has the stock that he had from when the company first went public. Well, there's a lot of gain in that. If these wealthy people were to die today, that millions, if not billions of dollars of capital gain would never be subject to income tax.
Annette Nellen (34:13):
No one seems to be... well, some people, but a lot of people aren't bothered by that. But if we can afford that tax break, then you think, if you're fine with that tax break, why not give a tax break to teachers? Why not tell teachers, and I've had my college professors, "Can you talk to teachers, tell them your income... your salary is tax exempt." I mean, what's the difference? I mean, it would probably add up to maybe the same level of a taxpayer, but because it's... we lack transparency how many people are seeing that what savings you get from these tax breaks, they're called tax expenditures, the drug can be a tax, the office management budget, congressional budget office. And then within all the states, they have agencies that gather all of this that say, not all of the spending is in our direct budget.
Annette Nellen (35:02):
Today at the federal level, the bulk of the spending compared to discretionary spending is actually in the tax law. Because that mortgage interest deduction, that's the equivalent of, you have a mortgage. Guess what? Every month we're going to send $1000 to help pay for your mortgage. There is no difference between that and taking a tax break. So far as what's in-
Alexander McCaig (35:23):
Annette Nellen (35:24):
... [inaudible 00:35:24] pocket, the government's pocket, it's the same-
Alexander McCaig (35:26):
... [crosstalk 00:35:26]
Annette Nellen (35:26):
...[inaudible 00:35:26] check where you take the savings through your tax return. That's why it's called tax expenditures. There's over 100 of those in the federal system. [crosstalk 00:35:38]
Alexander McCaig (35:40):
[crosstalk 00:35:40] things and... The transparency would help. Then this begs the question for me. If we talk about people understanding how their taxes are going into this system... and I don't even know if it's an open or closed system, if it was a closed system, I would hope it has a very minimal net loss to increase efficiency. Is there any data that actually supports when the money goes in is it actually benefiting what it's supposed to benefit? Where does the money go? After it's gone to the IRS, I don't think people really are worried about the trust factor. I think it's as I've paid money into something, and I have no idea how that money will be used. Because they're still walking around, seeing a pothole, they still see their sidewalks are all jacked up. Things aren't getting cleaned, things of that nature. Where does their tax money actually go? What data can prove that sort of trail?
Annette Nellen (36:39):
That's another good part about transparency of understanding, I pay these federal taxes, they obviously going to the federal government. At the end of the Obama administration, they had this taxpayer receipt where you can go online and say, here's my income taxes. Just very simple program just broken out into the broad categories of spending. This much went to Defense, this much went to the Department of Energy and all that. That helps a little bit, because we remind people about these categories of spending. But you'd also want to know, well, I also paid some state taxes, I paid local taxes, like your property tax mostly goes local. In California, for example, when you pay sales tax, part of it does come back to the local government. But in many ways it can get very complicated.
Annette Nellen (37:30):
So far as the state local factor in California, it get very complicated as to how much is coming and where is it going. And then sometimes there's odd things. I mentioned one, but it just makes you wonder where all does this happen? In California, we've had for some time where a local government can say, "We'll try and entice some big company to put their sales office..." Which might just be a few people, Psyche-commerce, put it in our jurisdiction because that's going to cause this use tax to all come here. And they get this big chunk of money, even though it might be for sales various parts of the state. If people really knew that, I think that's weird. Also we have in California where for enticing a company to do that, the local government can say, we're going to give you back part of that sales tax. Who would ever think when you paid sales tax, that part of it was staying with the company?
Annette Nellen (38:28):
It doesn't happen often, but there are those examples. But just makes you wonder, does that happen in other states? Because when you pay your tax, you think it's going to pay for the government services. Now, can everybody understand what all those government services are? Probably not. I mean, you might see people even thinking [crosstalk 00:38:46] there's a pothole in my street. Well, the federal government's not going to... isn't responsible for the pothole on your street. Maybe the one on the highway but not on the one on your street. I think we [crosstalk 00:38:58]. But just better understanding of this. I think asking elected officials, can you explain to me or show me where my property tax dollars are going? Because there is data that get-
Alexander McCaig (39:11):
Annette Nellen (39:11):
... to the government agency. They can obviously figure that out. That doesn't [crosstalk 00:39:14] I think if we just had better understanding of even some of the basics, and again, transparency, accountability to taxpayers, you would... Well, one, we'd better see some of the proposals being talked about today. I mean, you see folks like, "Oh my gosh, no, don't increase the estate tax." Well, the estate tax is owed by less than half of 1% of individuals, why are so many people concerned about it, or probably don't even really know what it is. Do people understand how much [crosstalk 00:39:49]-
Alexander McCaig (39:48):
I think it's just the idea [crosstalk 00:39:49] that the tax increases. They don't really care what it's about or who it's affects. It's just the fact that the government's coming in to increase their tax.
Annette Nellen (39:59):
... [crosstalk 00:39:59]
Alexander McCaig (40:00):
So whenever sort of...
Annette Nellen (40:00):
That's actually not what they're proposing for most people.
Alexander McCaig (40:05):
[crosstalk 00:40:05]. If they're polarized, it's obviously going to upset them, right?
Annette Nellen (40:11):
Alexander McCaig (40:11):
But again, there's a lack of information and clarity about it. We're asking the government for a little bit of help in getting our filings done more efficiently so that it helps them force their efficiency. Well, that in my mind increases the efficiency of them collecting cash from people. What they still haven't done is show people exactly how that money is spent. I know because I've looked at it, tax dollars don't even go to those things like potholes. They go towards debt. States have to pay off debt.
Alexander McCaig (40:41):
They have so many notes that they specifically taken out along with the federal government. So it is never actually directly paying something, the tax dollars go towards paying off debt that's been built up for a very long time. And then the real nice cash flows go to the Department of Defense. It's funny to understand that money being energy, the Department of Energy requires so much more cash. The basis of everything is energy. So if they're working with nuclear stuff, I don't understand why they need more money. But that's just, in my sense, it's a logical.
Annette Nellen (41:09):
We'll say at the federal level, there's far more debt... far less at the state government level because the states are supposed to be operating on a balanced budget. It's not that they don't have longterm [crosstalk 00:41:19]. It is hard to track. Also, your comment, the potholes, some money for roads, usually federal, but maybe some state as well, comes from the gasoline excise tax. You might think, well, why is there a special tax on gasoline? Which.... certainly a federal tax of 18.40 cents per gallon, which has been 18.40 cents per gallon since 1993. It's tied to per gallons. If you're driving an electric car, you're not even funding the roads. But the Highway Trust Fund is supposed to be for helping to fund these federal roads for maintenance and for development.
Annette Nellen (41:58):
It has not generated enough money to do that. It started back, I think in 2008, they had started moving money from the general fund over there. Why not fix it? We're not being honest with the taxpayers, if... or even explaining all that maybe the taxpayers would say, yes, that's fine. Let's even get rid of it. Let's just have the General Fund fund everything. But they need to do something because we continue to buy more fuel efficient cars, which means it's collects less money. That's what we're going to use for funding the roads, obviously we'll have a growing infrastructure problem. Right now the discussion about, we need money to fund infrastructure projects, that's something else that if... you kind of have to dig in to find these reports, even what the basic things are, they want to fund. The civil engineers would say, "You need a lot more than that."
Annette Nellen (42:49):
I mean, we get a D plus on some of the crumbling, bridges and roads. But where's the discussion about how we want to fund the maintenance of that so we don't have these crumbling things. We maintain them through our... how are we going to get the revenue for that? And why is the gas excise tax 18.40 cents and we don't seem to even focus on that people buying electric cars don't pay into any of that, unless there's a change in the law. Back when there was tax reform... There's tax reform discussions going on, even right after a major bill, we got have more taxes before discussions. There was an infrastructure sub-committee among the tax reform discussions going on in the Senate finance committee and their report suggested, well, we probably need to move to a vehicle miles traveled. Where you see how many miles you drove and you'd have a tax based on that.
Annette Nellen (43:46):
We know technology could capture that very easily. In the Bay Area, people have the little gadget in their windows so they go through the toll, they don't have to stop. Or yet there are things tracking you. Plus of course if you're carrying your cell phone, somebody knows where you are and how many miles you've traveled. That can all be handled. But they said in the report, it would probably take us 10 years to implement. Did they start it? No. It was just a discussion. We just talk about things, we don't necessarily follow through with that [crosstalk 00:44:17] probably six years ago.
Alexander McCaig (44:20):
Annette Nellen (44:20):
Well, and California-
Alexander McCaig (44:25):
I got to tell you, I can't wait for the day when someone shows me where the money actually goes to, because they ask us to be transparent as individuals but we find a real lack of transparency in other chains of flow that move through the government. I got to tell you from my K-12 education, the first thing that kicked me off on taxes was the Boston tea party. In some senses, I know what they feel like throwing tea at the park. I do jog [crosstalk 00:44:54] a little bit, I'm sure-
Annette Nellen (44:54):
Alexander McCaig (44:55):
... [inaudible 00:44:55]
Annette Nellen (44:57):
Alexander McCaig (44:58):
That was my first [inaudible 00:44:59] rebel.
Annette Nellen (45:01):
[inaudible 00:45:01] a tea party where they were challenging the tax on the tea and the stamps and all that. That's right. That's our only K-12 introduction to taxes. That's not a good one.
Alexander McCaig (45:13):
That was my thing. I still think of the times I would stand in Boston Harbor and reminisce, but we can all look back to the good old days. I got to tell you, Annette that this has been fantastic. I would love if you could share with people how they would find your blog, which has been around for, I think 14 years now.
Annette Nellen (45:32):
Yes. I just hit the 14 year anniversary on that. 21st century-
Alexander McCaig (45:38):
Congratulations on... What's your-
Annette Nellen (45:38):
... Thank you.
Alexander McCaig (45:38):
... name of blog?
Annette Nellen (45:40):
21st Century Taxation. You might think, isn't this the year... 2021 is that term out dated? Looking forward to the day when that was going to be outdated, I don't need the blog anymore. Because I'm really focused on how can we make sure that our tax system meets principles, is a good tax policy and reflects how we live and do business today, which would, in our conversation here be make use of technology here so far as the administration of taxes. That's actually another thing that when we talk about tax reform, it's usually we're changing the rules on how much is taxable. They should also look at how do we reform the administration of those taxes to make sure they operate in a sensible way today, such as using modern technology to its fullest. But 21st Century Taxation [crosstalk 00:46:29]-
Alexander McCaig (46:29):
Annette Nellen (46:29):
... find me.
Alexander McCaig (46:32):
... you heard it from the expert, Annette Nellen, professor, San Jose State University, editor, author tax, chair, Irvine fellow and cryptocurrency expert. Annette, thank you so much for coming on the show. We are very excited to read more of what comes out of those op-eds from the hill.
Annette Nellen (46:50):
My Pleasure. Thank you very much, Alexander. Thank you.
Alexander McCaig (46:51):
Speaker 3 (46:52):
Thank you for listening to TARTLE Cast with your hosts, Alexander McCaig and Jason Rigby, where humanity steps into the future and source data defines the path. What's your data worth?