Please don't pay me to research tax loopholes
By Scott Sumner
This is a response to Bryan’s recent post.
I’ve always been a critic of our income tax regime, which is extremely wasteful for all sorts of reasons:
1. Lots of wasteful paperwork.
2. Leads to wasteful expenditures on rent seeking in DC.
3. Discourages saving and investment.
While doing my taxes last week, I noticed another huge inefficiency; our tax system encourages us to research the intricacies of taxes, something I very much don’t want to do.
I recently discovered that there is effectively no income limit on contributions to Roth IRAs, at least since 2010. All this time I had taken the government at its word, and assumed that families with incomes above a certain cutoff point could not contribute to Roth IRAs. In fact, they merely have to set up a non-deductible IRA, and then one day later convert it to a Roth IRA. This backdoor into the Roth is completely legal. So why not just eliminate the income threshold entirely? That would be the sensible thing to do. (Insert joke here).
Now let’s suppose that since 2010 my wife and I have contributed about $60,000 less to Roth IRAs than if we had known about this loophole. In future decades, we would have saved lots of money had we known about the loophole, because you don’t have to pay taxes on investment earnings from Roth IRAs. I’m not sure how much we would have saved, but over several decades it might have been several tens of thousands of dollars.
OK, I don’t really need the money, so perhaps it’s not a great loss. But here’s the problem. The government was essentially offering to pay people thousands of dollars to do more research on the tax system. But I find that system to be really boring, and I’d rather spend my time trying to educate the public on monetary policy, or perhaps doing fun things. The government has also offered me tens of thousands of dollars to divorce my wife, and continue living with her in a “common law” situation. I don’t like getting these offers from the government; they are annoying. I know someone who took that offer and I wish him well. But I still don’t like the whole idea of a marriage penalty.
I’m told that in Sweden everyone files as single and it takes about 5 minutes to do one’s taxes. I’d be willing to pay slightly more taxes, if we had that sort of system.
Disclaimer. This post is not offering tax advice, and there are restrictions on the backdoor into a Roth IRA, especially for those who already have tax-deductible IRAs. Consult your tax adviser before trying any of this.