Piano World Home Page Forums Our Most Popular Forums Piano Teachers Forum New USA tax reporting requirement

In any tax system (and in most policy design of any sort) there is a tradeoff between the virtues of simplicity and the virtues of information. More information means more effective targeting, i.e. you can redesign rates to be more effective at generating desired revenues. With rich and accurate reporting you can indeed get more revenue out of the existing rates, and thus lower rates where particular taxes (like those on income) have serious disincentive effects on work.

But collecting information is itself costly. How you collect it can set up traps for people, and as noted above we may wind up employing scarce resources (all those tax accountants and IRS agents) that ideally have socially more productive things to do than wring a few extra tax dollars out of scofflaws while eating up gobs of public resources (AKA their salaries).

New tax reporting processes, even if promulgated just to enforce existing rules, do not necessarily make things better if all the reporting costs create real barriers to productive enterprises.

In a sense, I'm siding with both sides. Monica is right to point out how the complexity of our processes imposes substantial business costs that may far outweigh the beneficial effects of garnering a few extra dollars of revenue. theJourney is also correct in noting that a substantial part of our problem is the inefficiency of the mechanisms we currently use in collecting information and tax revenues. And John is right that there are few examples of added tax collections (via stiff reporting requirements) that seem to have led, ipso facto, to lower tax rates elsewhere in the economy.

But a sensible redesign of our tax code and our information-collection processes could lead to a much better social outcome, if our political structures allowed people to cross party boundaries and compromise.

There is no reason to allow small businesses to evade taxes, and any 'everybody does it' or 'it's our fair pay back' kind of logic is not going to get any respect from me. And there is no reason to endure a tax system in which the accountant is an important resource for just about every family and every small business. That's a waste of labor power. Those extra accountants should be redirected over time into some socially more useful activity (along with lots of lawyers and probably a few economists). To reduce the demand for their services we need a tax code that is simpler and that does not require a blizzard of paper in which all sorts of things can be hidden or misplaced.

There are examples of politics working properly for the good of just about all. Some may be old enough to remember Bill Bradley working together with Ronald Reagan to craft a bi-partisan tax reform that reduced and eliminated many loopholes and exemptions in exchange for broad tax cuts. It worked, for a while. It can work again, especially if we can make the system more transparent by reducing the amount of paper people must process in order to understand their position and determine what they actually owe.

Not unless they are a business. It's business-business transactions.

This thread, which I started because of comments I heard on CNBC (a financial television channel I was watching as I was washing up the dishes, and wanting to know how the market had performed for the day) mentioned that purchases in excess of $600 would require businesses submit to the IRS a form 1099 documenting the purchase.

I immediately thought of the new washer and dryer we purchased last fall. What business is it of the government to know that I personally purchased a new washer dryer.

As soon as I finished the dishes, I began a search to discover what implications it would have on my teaching business. And that's what I reported.

For those of you who are making snarky comments about teachers not reporting income, I suggest you take it somewhere else. Most of us, and at least me personally, are very scrupulous and honest in our reporting. It's a pain, but I really don't want to pay a big fine or do jail time.

I am sending a request to our national teacher's organization, MTNA, to have their legal counsel investigate and asking them to publish in American Music Teacher, the monthly journal, what the results of their findings are.

I will report back to the forum anything of interest they provide.

Great post, piano*dad. You outline very nicely my objection to the new regulations, which is NOT that it is leading to new taxes but rather that it is an inefficient mechanism that will create a significant burden for small business owners and sole proprietors.

Andy, this may be true, but this is not what CNBC reported.

Perfect analogy.
Thank you.

Hopefully he won't say "Hogwash" to you too.

(It's exactly the same thing.)

And actually, me too.

I wouldn't relish having to do more paperwork. I have more than enough already, as does everyone else.

But before we draw conclusions about this (especially tunnel-visioned ones), let's understand exactly what this would be -- and let's try to understand how it fits in with the big picture.

Which requires more than just looking at it and screaming "Dammit this sucks."

Monika, you and your husband have my sympathy. The CNBC story focused on the impact of the new law on coin dealers.

As many know, a lot of Americans are buying gold coins as a hedge against inflation and the dollar collapse. Each Golden Eagle, Canadian Maple Leaf, or Krugerrand, would have their purchase recorded and reported to the IRS.

One supposes that this is prelude to confiscation of gold like FDR did back in the '30s.

Unless I grossly misunderstand what this requirement might be (even in any imagined extreme form), you are exploding its meaning into absurdity.

Were the washer and dryer business purchases?
Assuming they weren't, how does this come into the discussion?

About reporting or failing to report income: Nobody was talking about whether YOU do or don't report income; they're talking about practices in general. It seems like somehow you're not inclined to look at how a tax rule affects the larger picture (and how the larger picture affects you).

Perhaps I missed it, but I haven't seen anyone making snarky comments about teachers not reporting income.



Well, I can certainly recommend that people try to get their news from newspapers and quality periodicals rather than from television. Television news is meant to visually entertain and to sell advertising. Their purpose is to get people Excited and to stay tuned, not necessarily to properly inform them. Television does not lend itself for in-depth reporting, reasonable detail nor for nuance. IMO, the best thing about television is the "off" switch.

Here's an excerpt from an article about the new rules in CNNMoney.com

Henschke's group had previously surveyed its members and learned that they average 10 filings a year of 1099 forms, each of which takes about half an hour to prepare. That's in line with the GAO report, which found that a typical small business spent between three and five hours per year filing 1099s.

But SMC's survey found that extending 1099s just to services purchased from corporations would push that number to at least 200 filings per year for a typical small business -- adding an estimated $6,000 to the cost of preparing the average tax return. And that's without even accounting for the requirement that 1099s be filed for purchases of goods, a provision that Henschke's group didn't see coming when it conducted its survey last year.

The new rules are not just a minor inconvenience of submitting a couple of extra forms at tax time. $6K in extra accounting costs will be a real hardship for a lot of small businesses.

Just a note here. I'm not against paying taxes. I report all my income from bookkeeping even if it's not enough from a particular client to get a 1099 from them. So I'm not into evading taxes.

With QuickBooks, which many miniscule and small businesses use, keeping track is not a bigger problem than what I already do for my clients. The reports are already there.

But someone said "It's a 1/2 hour extra for my tax preparer." But it's a 1/2 hour (or more) for every one of your tax preparer's clients, some of whom may be a lot bigger than you. I send out the 1099's for my clients, not their tax preparer, so for me it's extra for each client I have. It's going to be more than 1/2 hour extra in total.

They pay me, which may seem like an advantage to me, but ya know, there's always trade-offs. This is, as we say, another nickle in the nickle-and-diming to death category in terms of time.

And do we really think that having every business in the country sending in 1099's to Office Max is going to make a difference in how Office Max files their taxes? Or 1099s to the phone company? What a waste.

And those who want to evade taxes - will. Where there's a will there's a way

No, I don't think for miniscule businesses own tax reporting it will be that much extra. Not for my bookkeeping, not for a couple of my clients. But there's a big middle for whom this will, as some here say, suck up a lot of resources that could have been used elsewhere. Creating more bookkeeping jobs like the ones that track and report this - oh well.

Cathy

We have gone from tax reporting requirements to tin foil hats in record time here.

Yeah... the coin industry is not at all happy about this. I'm not sure we'd have to file 1099s on retail purchases to and from private individuals (beyond the $10,000 in cash sales trigger for 1099 reporting that currently exists), but we do a lot of wholesale business, the vast majority of which is above $600 that will now require 1099 forms.

[edit: Looks like retail purchases ARE included under the new law, yikes!]

Well, I understand the analogy, but it's far from perfect. There is a big difference between firms that operate in a competitive market and a government that has monopoly power over the tax base.

For firms subject to shoplifting, that is a cost of business and it must be paid for. Shoplifting translates directly into higher prices to consumers. If firms figure out a way to reduce shoplifting, the benefits of that will translate into higher profit for a while, but over time it'll translate into lower prices as competition drives profit back to long run normal levels.

Tax evasion by some does not necessarily translate into higher taxes for everyone else, because unlike firms in a competitive market the government has no 'bottom line.' There is no set amount of revenue it must raise come heck or high water. Evasion by some need not imply higher taxes on others. It could mean a smaller government instead. I didn't say that was good. Smaller government means fewer services or transfers. You judge that as you will.

But tax evasion by some does not automatically mean higher taxes on others. It does mean higher taxes than you might have to levy in a more perfect system, but that's not quite the same thing.

True, even if it's CNBC.

There are also other societal costs to tax evasion that are considerable. One I have already mentioned up thread: taxes are used to create an environment that allows all of us to prosper and earn our livings. To the extent that public policy and society objectives are thwarted by an unnecessary lack of funds, these costs are high.

For example, just as prohibition brought about a wave of institutionalized hypocrisy and acceptance of breaking the law as justified and normal in the US population that persists until today, it is also true that widespread tax evasion that is not enforced against has a negative impact on the norms and mores of a society. If cheating and stealing and winking becomes the standard, then the areas in which corruption and graft is considered normal will increase. Levels of mutual trust will decrease. Trust is a requirement of a well-functioning and effective liberal market democracy and civilized society.

^^ That's an admirably sophisticated view that is a breath of fresh air alongside some of the tunnel-visioned stuff we're seeing on here.

Great post, and greatly said. It's an important angle of the subject.

If we can't see beyond ourself and the next 10 minutes, we can't grasp what any of this is about.

Welcome to Argentina, or Greece, though those two are hardly alone.

Well, this hasn't been reported in our local paper; nor has it been reported in any of the financial journals (that I can find) and I didn't see it in the Wall Street Journal, so perhaps we shouldn't be so quick to condemn the tv. It turns out that it did appear in an op-ed on May 27th, of all days, and I remember reading much of it, but I totally missed the implications for piano teachers.