Millennials Need a 21st Century Tax Code
Tax Day is upon us, and once again it is a reminder of how intricate and complicated the tax code really is. At nearly 75,000 pages, the code is easily the most onerous thing government ever spawned by government.
As Millennials eager for economic opportunity in the short-term and sustainable growth in the long-run, we are hopeful that the President Trump and congressional leaders will pursue a new course on taxes. Our generation’s views on work and the economy are already driving growth in the sharing economy and redefining what jobs look like for the 21st century.
It’s no secret that President Donald Trump has made it a key agenda item to revamp the tax code, a political feat not seen since President Ronald Reagan and Speaker Tip O’Neill accomplished sweeping reform 1986 – the last time any major federal tax reform proposal was signed into law.
Just as the Baby Boomers were arguably the biggest beneficiaries of reform 30 years ago, Millennials will be most impacted by any reforms secured by Trump and Congress today. To provide a long-term solution, the tax code must reflect the largest bloc of the workforce. Beyond the core tenets of pro-growth tax policy – broadly-defined bases, simple and consistent rules, and low rates - to allow the kind of economic growth young Americans are ready to create, reforms must be made to the tax treatment of the sharing economy and flexible working arrangements, in general.
Millennials make up about 30 percent of the American population, but account for just shy of half of those finding work and earning income in the sharing economy. With this peer-to-peer economic activity projected to break a quarter trillion dollars in the next five years, it’s no wonder nearly three fourths of Millennials hold a positive view of the sharing economy - a rate higher than any other U.S bloc.
Unfortunately, the outdated complexity of the revenue code has given rise to a plethora of effective tax penalties that tamp down potential growth in newly developing economic sectors. For workers in the sharing economy (such as Uber, Lyft and Airbnb), the burden of federal taxes can far outpace that for a comparable worker in a traditional employment setting.
A young American earning money in the sharing economy is required to report work to the IRS as a self-employed, “sole proprietorship,” using a 1099-Misc or 1099-K form rather than a W-2 form. As such, these young workers are required to pay the full entitlement tax of 15.3 percent, while workers with employers only pay 7.65 percent (the other 7.65 percent being paid by their employer). The injustice here is that employers may deduct the 7.65 percent that comes out of their employees’ paychecks as a labor expense, while a young worker in the sharing economy is offered no such benefit.
Another area to address that could save money and time for sharing economy workers would be to raise the income threshold allowable for sole proprietorships to file using the simplified Schedule C-EZ form. Most taxpayers do not actually have anything to declare that would require the longer Schedule C form, so the government allows self-employers who meet certain conditions, for instance those earning less than $5,000 in professional income annually, to file an abbreviated form like the 1040 version used by W-2 employees.
This allowance saves considerable hassle for the taxpayer and reduces paperwork for tax examiners in Washington. However, the threshold is far too low for many of those who work, even part-time, in the sharing economy to benefit, despite their tax returns being no more complicated than a comparable employee.
A major obstacle to even more flexibility in the job market is the outdated assumption baked into the employer-sponsored health care deduction that only those in traditional employment settings should be afforded the tax benefits meant to increase access to health care. Millennials are more likely than past generations to explore career changes. However, under the current tax code, switching jobs or going freelance can mean much higher health insurance premiums because individuals who purchase health insurance face a much higher tax burden on that insurance than do employers who cover their employees. If this deduction were equally applied – and the employer exclusion capped – then young Americans would have truly portable health care coverage and could be freed to develop new skills and find work where they can contribute more and improve their own lives.
Finally, Congress and the Administration can provide further relief for the tens of thousands of Millennials who work from home by amending the home office deduction. Since 1995, as Millennials entered the workforce, the number of Americans working from home offices has more than doubled. No small part of this growth is due to the rapidly growing understanding that multi-use spaces can increase inefficiencies, but the tax code still contains the arcane requirement that a home office be for “exclusive business use.”
This puts at a disadvantage workers who may be unable to afford to devote part of their home to no purpose but work, like the young parent who must choose between increasing their tax liability or locking their infant out of a room. A modern tax code would respect the evolving meaning of work and end this penalty on professional choice.
Provisions like these create unfair penalties on those who choose to work under 21st century arrangements, and tax reform could boost working Millennials by modernizing the treatment of income and the processing of employment status.
Tax reform today has the potential to significantly impact the ability of the Millennial generation to play a substantial role in future U.S. growth. That’s why any tax reform proposal offered must unquestionably consider the youngest generation in our workforce.