Sunday, September 21, 2008

Making local and state income tax collection more efficient

We can cut the overhead introduced by local and state income tax collection nearly to zero by delegating this duty to the IRS across the board. The way this would work:

1.) a local jurisdiction determines some level of taxation. This level of taxation would be then
2.) converted into a fraction of the federal tax take for that jurisdiction, and then
3.) this single number would be computed and forwarded to the IRS.
4.) Then the IRS would use this fraction to compute a final multiplier for each taxpayer's obligation.

Example: the IRS collects $32 billion from Nevada for the tax year 2008. This number becomes known in April of 2009. At that time, Nevada looks at their locally authorized tax, which is $8 billion. Since 8/32 = 25%, they ask that the IRS collect an additional 25% in tax using a 1.25 multiplier. The IRS applies this multiplier to all Nevadan tax returns, and cuts a check for the $8 billion to the state.

This proposal eliminates most of the need for state and local level income tax collection bureaucracy. It would impose a relatively minor burden on the IRS of determining what state to associate income with; this is normally obvious, but would entail added complication for individuals apportioning their income to multiple states.

For individual taxpayers, this proposal would save them time by relieving them of the need to file state or local tax returns.

This proposal removes the ability of local jurisdictions to deviate from the feds in their tax policy (e.g., by making tax rates more or less progressive than the IRS, etc.). But this seems a price well worth paying to be able to eliminate all the generally redundant headaches that go with duplicating the logic and function of the IRS on the local level.

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