The Six-Hundred-Dollar Tax Folly
by Fred E. Foldvary, Senior Editor, 29 August 2010
Starting in 2012, enterprises in the United States are going to be burdened with greatly expanded regulatory reporting requirements. Every sale of $600 or more will require filling out and sending a form.Forms are regulatory pollution. Forms squander resources, increase costs, kill enterprise, prevent employment, stifle growth, and keep economies depressed. Forms are economic madness.
U.S. enterprises, both for profit and nonprofit, have had to report payments annually on form 1099, following the requirements in Internal Revenue Code section 6041. The Internal Revenue Service compares the amounts on these forms with reported income to check for tax evasion. But until now, payments made to corporations, such as office rentals, did not have to be reported. Payments for property such as office equipment also did not have to be reported.
Now the new federal medical service law (section 9006 of P.L. 111-148, the Patient Protection and Affordable Care Act) imposes many more 1099 forms. Starting in 2012, payments totaling $600 or more during a year to any recipient will have to be reported. A business will also have to obtain the taxpayer identification number (TIN, such as the Social Security number for individuals) of the person or firm paid. Businesses will have to supply customers with their TIN to avoid backup withholding of taxes on payments they receive.
Payments of “gross proceeds” will also have to be reported. What does this mean? The law is not specific, so every enterprise is waiting anxiously for the IRS to explain it.
The new requirements impose mountains of paperwork which will eat up hundreds of million worker hours. Accounting programs and methods will need to be changed. It will be full employment for accountants, lawyers, and computer programmers, and makers of filing cabinets, but this will be useless make-work.
The hit song in 2012 will be “The $600 reporting blues.” If you are wondering why the American economy is declining, why wages are stagnant, why economic power is shifting to Asia, why unemployment remains high, why the economy is not bouncing up, the answer is simple. Government is imposing ever greater tax and regulatory burdens. Government is killing the economy, and the $600 folly is exhibit A.
If payments made to a firm involve backup withholding, the taxpayer has to keep track of the withheld amounts in order to claim credit for these in tax payments. Taxpayers will have to torture themselves trying to understand IRS booklets with complex instructions such as the following (Warning! May cause drowsiness!):
“Box 7. Shows nonemployee compensation. If you are in the trade or business of catching fish, box 7 may show cash you received for the sale of fish. If payments in this box are SE income, report this amount on Schedule C, C-EZ, or F (Form 1040), and complete Schedule SE (Form 1040). You received this form instead of Form W-2 because the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax. If you believe you are an employee and cannot get the payer to correct this form, report the amount from box 7 on Form 1040, line 7 (or Form 1040NR, line 8). You must also complete Form 8919 and attach it to your return.” Imagine reading several pages of such instructions, which refer you to other forms and instructions. And those forms refer you to yet other forms.
With dozens, maybe hundreds or thousands, of 1099 forms sent and obtained by a firm, the probability of error rises, and there are big fines for misreporting, interest on under-payments, and criminal prosecution for willful failure to report. Since payees have to provide their Social Security numbers to payers, this vastly increases their vulnerability to identity theft.
The income-tax laws of the U.S. states impose additional reporting. For example, in California, if one employs an independent contractor and pays $600 or more, one has to fill out Form 542 and send it to the Employment Development Department. States typically copy the federal requirements, so enterprises will have to send forms to their state governments also.
Compare all this with what would be required if there were a single tax on land value. Your county government would send you a monthly bill, and you would just pay it. It could even be deducted automatically from an employee monthly salary, or a bank account, if one wished. There would be no forms and no required records.
Taxes on explicit income or sales induce tax evasion, and the logic of tax collection eventually leads to ever stricter and burdensome reporting requirements. Only the total abolition of explicit taxes will eliminate deadly forms. The beauty of public revenue from land rent is that it does not tax explicit actual payments, but rather the implicit economic rent or value of land. Thus the payment does not depend on what the title holder or tenants do, but only on the economic value generated by nature and community. A good bumper sticker is: Tax implicits, not explicits!
If you understand this concept, congratulations, you are one in a million. What will you do with your enlightenment?
-- Fred Foldvary
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Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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