The vast majority of Americans voluntarily pay what they believe they owe in taxes, and it’s a lot—about $900 billion last year,” Mark Weinberger says.
Weinberger, the former top tax official in the Bush administration and a former Capitol Hill staffer, is now with the accounting firm Ernst & Young.
“Most of the cheating comes from underreporting of income by small and medium-size businesses or those dealing in cash,” he says. “You eat in a restaurant and pay cash, and sometimes they won’t ring it up in the register.”
Weinberger, 44, was born in Scranton, Pennsylvania, where his father was a plumber and his mother a homemaker. After graduating from Emory University with degrees in economics and political science, he went on for an MBA and law degree from Case Western Reserve University and then a master’s in tax law from Georgetown University Law Center.
Weinberger was nominated by both Democratic and Republican presidents and twice unanimously confirmed by the Senate: In 2000, President Clinton nominated him to serve on the Social Security Advisory Board; the next year, President Bush nominated him to be assistant secretary of the Treasury for tax policy.
In the early 1990s, he was tax and budget aide to Senator John Danforth, a member of the Senate Finance Committee. Weinberger was chief of staff on the President’s 1994 Bipartisan Commission on Entitlement and Tax Reform and, in 1999, a member of the National Commission on Retirement Policy.
He now heads Ernst & Young’s Americas Tax practice, including strategy and operations, client relations, and risk management. It was rumored that last year he was asked to be deputy Treasury secretary; he declines to confirm the reports.
Weinberger lives in Potomac with his wife, Nancy, a former meeting planner who now is a stay-at-home mom to Rachel, ten; Noah, eight; and six-year-old twins Benjamin and Sean.
As tax season got under way, he talked about what he’s learned.
Are Americans taxed too much?
That’s like asking if the car you just bought is too expensive. It’s a value judgment.
Taxes are what we pay to get services from the government. As long as we want more services, we’re going to see taxes go up. The American people decide if they want government to spend more or less.
We tax ourselves differently than other developed countries do. We get more from income taxes; European governments get more from consumption taxes. Our income-tax rates are relatively high since that’s the main means of federal taxation. Overall, our tax burden isn’t terribly out of line with that of other developed countries.
But our government spends much more than it taxes.
True, but that’s only a timing difference. Eventually, we’ll need to raise enough taxes to pay our annual deficit and long-term debt. The deficit’s a deferred tax increase.
Why are income-tax returns so unintelligible?
Because we ask our tax system to do more than just collect revenues. We administer social and economic policy through our tax system. Plugging in these social goals creates a far more complicated system. IRS agents are tasked with deciding issues way beyond the expertise of any tax collector.
Take research-and-development tax credits or healthcare write-offs. We’re asking the tax collector to determine what’s legitimate cutting-edge research or a needed medical procedure.
From a tax-policy standpoint and for efficiency and simplicity, it would be better to have a tax system designed solely to raise needed revenue and to leave the social priorities to federal programs funded from this revenue. That would make tax returns much simpler. But we’ve chosen to turn the tax code into a means of achieving social goals.
Nearly three-quarters of Americans have relatively simple tax returns. It’s the other 25 percent—the people who itemize deductions and take advantage of other incentives—who file complicated returns. Lower-income people also suffer through a complicated earned-income-tax-credit program.
My guess is that if you asked people whether they’d give up those tax deductions and credits to have a simpler tax return, you wouldn’t get many takers.
What’s the most outrageous tax break?
Where you stand depends on where you sit. To someone who’s benefiting from a particular tax break, it isn’t ridiculous.
Personally, I don’t like the alternative minimum tax. Congress begins by saying we’re entitled to various deductions and credits, because they create incentives for desirable behavior or to foster a public good. Then it turns around and says, “Just kidding! You took more than we anticipated, so we’re going to take it back from you through the AMT.”
How many people pay the alternative minimum tax?
About 4 million, but if Congress doesn’t pass some temporary relief again this year, the AMT will hit more than 20 million people next year.
It doesn’t just apply to the wealthy—a large percentage of middle-income taxpayers will find themselves paying it.
Why not give taxpayers a choice between the existing code and a simple flat tax?
Everyone would still have to calculate the alternative tax liabilities, to see which was lower. And relying solely on a flat tax would gut all the investment and social incentives that Congress laboriously built into the tax code.
Going to a flat tax—assuming you mean a system with one tax rate and no deductions—raises a host of issues. The system may come out simpler, but it may end up being less fair. By putting things back into the system to make it more fair, you would add back the complexity.
Also, we’d have a radical shift in the tax burden. For example, those in high-state-tax jurisdictions, like New York and California, would lose state-tax deductions; those who save a lot would lose their savings incentives; the child credit would be gone; and those who have big mortgages would lose their interest deductions.
If today’s tax code incentivizes savings, why are Americans’ saving rates so low?
We should be putting more money away in 401-K and Roth accounts, but in too many cases people succumb to our culture of instant gratification.
A surprising number of taxpayers who could afford to don’t take full advantage of the savings incentives. The 401-K pension deductions and IRAs provide huge benefits for tax-free accumulation of wealth. Once that wealth starts compounding tax-free, it becomes an even more tremendous benefit.
Likewise for education incentives, such as Section 529 savings plans or the Coverdell tax credit, which allows money ultimately spent on qualifying education to be accumulated tax-free.
There’s also a new savings incentive—vastly underutilized—called health savings accounts. If your employer provides insurance policies that meet certain high deductible requirements, you can put money aside for your future health needs, and it accumulates tax-free. And you can roll it forward, year by year, to build up a nice-size amount. As long as you use it for future qualifying medical needs, the earnings aren’t taxed when withdrawn.
The President recently proposed expanding the amount that can be contributed to—and the availability of—such plans. As we all grow older, that’s a great vehicle.
Remember that while the tax code creates incentives to save, it also encourages us to consume. The home-mortgage-interest deduction, for example, provides a subsidy to buy a house.
All in all, our tax system still makes it more costly to save than to spend. In many cases, we double-tax—even triple-tax—savings.
How does that work?
When you earn a dollar, you’re taxed on that. Then when you put that dollar into your bank account, you’re taxed on that, too—unless it’s in one of those limited-savings vehicles. If, however, you spent the dollar, you aren’t taxed again. Moreover, if your savings go into a corporation, you’re subject to a different type of double taxation. The company pays tax on its earnings, then it dividends the money to you. You pay a tax on that dividend—and when you put the dividend in the bank account, your earnings on it are taxed, too.
That seems kind of stupid.
It is. The easiest remedy is to eliminate that double taxation on income. We’ve seen a great debate on that issue. The President and Congress have already lowered the taxation of capital gains and on dividends to a top rate of 15 percent. Congress is debating whether to extend that lower rate past 2008.
I think we should go further and eliminate the double taxation of corporate income. Other countries generally don’t have that double or triple taxation. If we reduced or eliminated the double taxation, we would make the United States an even better place to invest. We’d attract more foreign capital and therefore stimulate US jobs.
But isn’t a simple flat tax better?
The name “flat tax” suggests simplicity and fairness. But when you try to introduce the economic and social incentives that policymakers also want, you could end up back in the same place.
Although a flat tax is often assumed to be a flat-rate income tax, as proposed by members of Congress it’s actually a type of consumption tax.
What is a consumption tax?
In a consumption-tax system, individuals are generally taxed when they spend money as opposed to when they save or earn it. The tax can be collected in many forms—such as through a value-added tax, a national sales tax, or a flat tax. Besides reducing today’s tax burden on savings and investment, this type of tax is far more economically efficient.
But it could have big disadvantages. It’s considered regressive by some or proportional by others but not progressive like the current system. So the poor will pay a larger amount relative to the current system.
Our current system is called an income tax, but it’s actually a hybrid. It has elements of a consumption tax, like the deferral of tax on certain savings, yet it still primarily taxes income.
A new tax system based solely on consumption would be such a fundamental change that Congress probably wouldn’t go along with it.
Would it be easier?
Sure, a flat tax would be much simpler—both to understand and to pay. Without any deductions or credits, it would be more efficient for government tax collectors. And it would encourage savings, since you’d pay no taxes on dividends, capital gains, or interest.
Even with all these advantages, people still complain in those countries where it’s been implemented.
It’s essential that we create and maintain confidence in our system. Otherwise our “tax gap” will grow as opposed to shrink.
What is the tax gap?
The tax gap is the difference between what taxpayers pay and what they should be paying under the law.
It’s very hard to estimate, and I don’t put a lot of faith in any specific number, but the IRS recently estimated it at around $290 billion for 2001. It’s a big number. But it also means that about 85 percent of owed taxes were voluntarily paid to the IRS. Of the unpaid amount, some of it was likely not paid due to error and some due to evasion.
But again, we pay a lot of taxes voluntarily without IRS intervention. Our voluntary system depends on people having confidence in the tax system. That’s why the debate around simplicity and fairness of our tax system is so important.
How good are accountants and computerized tax programs? Money magazine sent out the same tax information to H&R Block and other tax preparers and got vastly different returns back.
That’s due to the complexity of our tax system. The same was done with the IRS help line. Many IRS agents got the wrong answers on issues, or at least different answers.
Accountants can add a lot of value in planning how to arrange your affairs to minimize your taxes. Your accountant can also keep you out of trouble by helping you comply with the laws.
The computer programs are pretty good. They simplify and organize your data; they’ve become very easy to use. But remember that any of these software packages is only as good as the data you provide. You’re still the one responsible for honestly paying your tax bill.
What have you learned about life?
Many things, and I’m still learning.
When making a big decision, look at all the facts, talk to as many people as possible, and make a decision. Indecision is usually worse than making any particular decision.
Inclusiveness is always better than exclusiveness. The more you can sit down and listen to everyone, the better your decision will be—even if you disagree with many coming in to see you.
You’re never able to wait for the perfect answer at the perfect time. You’ve got to use your judgment, rely on your experiences, and move forward.
When you make a mistake, admit it fast, fix it, and move on.
It became clear to me while working at Treasury, on Capitol Hill, and in practice that answers are rarely black and white or positions clearly right or wrong. Often, it’s a choice between two rights. You need to judge degrees of right.
National editor Ken Adelman (firstname.lastname@example.org) has been conducting What I’ve Learned interviews since 1988.