With inflation kicking U.S. consumers in one shin, Congress is kicking them in the other at tax time.
Consumer inflation is starting to fall, but it's still higher than at any time since the 1970s. Energy and food prices—which are closely related to energy—are still painfully high.
But many taxpayers looking to a tax refund to help plug the gap in their budgets will be disappointed this year.
Several special provisions enacted during the pandemic are falling away. For example, the child tax credit rose to $3,600 per child in 2020-2021. In 2022, it's reverting to $2,000. The child and dependent care credit, critical to many working families, had been expanded to $8,000 but is now reverting to $2,100.
Another source of pain is the self-employment tax, levied in lieu of Social Security and Medicare taxes on employee wage packets. Hundreds of thousands of Americans took up “gig economy” self-employment during the pandemic but had no idea they were on the hook for this tax. They are now facing substantial penalties that will be deducted from their tax refunds.
Overall, economists estimate that the average tax refund could fall by as much as 30% this year.
This illustrates one of those maddening features of the U.S. tax system: its complexity and variability.
Many countries around the world have income taxes, but none have systems as bizarre as America's.
Estonia, for example, has a simple system that takes less than 5 minutes to file a tax return online, with no cost to the taxpayer. The country's revenue department developed a web-based system that automatically pre-fills tax information like salary and deductions, and figures tax liability. The taxpayer merely has to check the calculations to confirm them rather than perform them herself.
By contrast, U.S. taxpayers spend an average of 13 hours and $240 annually on tax compliance. And despite the extraordinary complexity of U.S. tax, only 10% of people trying to get through to speak to a live agent at the IRS succeed.
One source of this complexity is lobbying by the tax preparation industry. Intuit, for example, whose popular TurboTax programme costs around $100 a year when state filing is included, has lobbied heavily to prevent Congress from creating a free online filing system available to everyone, like Estonia's.
But the biggest source of U.S. tax convolution is the tax system’s role in federal government policy initiatives.
Unlike most of its peers, the U.S. political class is deeply reluctant to enact federal policies that intervene directly in citizens' lives. Instead, it uses tweaks to the tax code to encourage or discourage certain types of behavior based on their tax consequences. Tax exemptions for retirement savings are a case in point.
That alone would be a huge source of complication for the tax code. But the bigger issue is that this approach invites constant lobbying to tweak the tax code. Big corporations and important constituencies like the energy sector, Wall Street, and farmers can demand tweaks and concessions that complicate the tax code for everyone.
One of the best examples of this is the mortgage interest deduction. It's a massive tax subsidy to households that can afford to buy a house, and deeply distorts housing markets for everyone. But it's essentially untouchable given the power of the real estate lobby.
And every time Congress changes corporate tax rates, businesses and individuals rush to change their status to take advantage of new rates.
Politically-motivated chronic underfunding of the IRS—ostensibly designed to protect taxpayers—has the opposite effect by making the agency overworked, understaffed, and under-resourced. With the IRS unable to help taxpayers with their problems, U.S. taxpayers are forced to pay specialist tax preparers to do what citizens of other countries can do easily and for free.
So, this tax season, if you're thinking about obtaining residence or citizenship of another country, keep in mind that tax rates aren't the only thing that makes moving abroad attractive.
The opportunity to avoid the self-created insanity of the U.S. tax code is another big draw!
Ted Baumann is International Living’s Chief Global Diversification Expert. He's traveled to nearly 90 countries and is a dual citizen of the United States and South Africa. Ted has been published in international research journals, as well as in media outlets such as Barrons, Forbes, and Cheddar. Learn more about Ted Baumann here.