Wednesday, June 5, 2024

This AI Tax Assistant Actually Seems Pretty Useful


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The promise of AI chatbots lies in their seemingly infinite wisdom and asking them any question you can think of—plus the simpler stuff, like writing a thank-you note, crafting a cover letter, or even having a spoken conversation. However, there are limitations. I’ve previously turned to ChatGPT to test out its personal finance expertise, only to be told:

As an AI language model, I cannot provide financial advice or make specific investment recommendations…you may want to consult with a financial advisor who can provide personalized advice based on your individual financial situation and goals.” In other words: Don’t go to chatbots to make financial decisions.

Now, however, H&R Block has released a new AI chatbot specifically for your tax questions—an arena where, in the past, I’d say AI should not be trusted. Using conversational AI, this virtual tax expert can answer many of your common tax questions and supplement your understanding of the tax process, and it seems surprisingly useful….Story continues

By: Meredith Dietz

Source: H&R Block’s AI Tax Assistant Actually Seems Pretty Useful 

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Critics:

In the absence of negative externalities, the introduction of taxes into a market reduces economic efficiency by causing deadweight loss. In a competitive market, the price of a particular economic good adjusts to ensure that all trades which benefit both the buyer and the seller of a good occur.

The introduction of a tax causes the price received by the seller to be less than the cost to the buyer by the amount of the tax. This causes fewer transactions to occur, which reduces economic welfare; the individuals or businesses involved are less well off than before the tax. The tax burden and the amount of deadweight cost is dependent on the elasticity of supply and demand for the good taxed.

Most taxes—including income tax and sales tax—can have significant deadweight costs. The only way to avoid deadweight costs in an economy that is generally competitive is to refrain from taxes that change economic incentives. Such taxes include the land value taxwhere the tax is on a good in completely inelastic supply.

By taxing the value of unimproved land as opposed to what’s built on it, a land value tax does not increase taxes on landowners for improving their land. This is opposed to traditional property taxes which reward land abandonment and disincentivize construction, maintenance, and repair. Another example of a tax with few deadweight costs is a lump sum tax such as a poll tax (head tax) which is paid by all adults regardless of their choices.

Arguably a windfall profits tax which is entirely unanticipated can also fall into this category. Deadweight loss does not account for the effect taxes have in leveling the business playing field. Businesses that have more money are better suited to fend off competition. It is common that an industry with a small amount of very large corporations has a very high barrier of entry for new entrants coming into the marketplace.

This is due to the fact that the larger the corporation, the better its position to negotiate with suppliers. Also, larger companies may be able to operate at low or even negative profits for extended periods of time, thus pushing out competition. More progressive taxation of profits, however, would reduce such barriers for new entrants, thereby increasing competition and ultimately benefiting consumers. Complexity of the tax code in developed economies offers perverse tax incentives.

The more details of tax policy there are, the more opportunities for legal tax avoidance and illegal tax evasion. These not only result in lost revenue but involve additional costs: for instance, payments made for tax advice are essentially deadweight costs because they add no wealth to the economy. Perverse incentives also occur because of non-taxable ‘hidden’ transactions; for instance, a sale from one company to another might be liable for sales tax, but if the same goods were shipped from one branch of a corporation to another, no tax would be payable.

To address these issues, economists often suggest simple and transparent tax structures that avoid providing loopholes. Sales tax, for instance, can be replaced with a value added tax which disregards intermediate transactions. Following Nicolas Kaldor’s research, public finance in developing countries is strongly tied to state capacity and financial development. As state capacity develops, states not only increase the level of taxation but also the pattern of taxation.

With larger tax bases and the diminishing importance of trading tax, income tax gains more importance. According to Tilly’s argument, state capacity evolves as a response to the emergence of war. War is an incentive for states to raise taxes and strengthen states’ capacity. Historically, many taxation breakthroughs took place during wartime. The introduction of income tax in Britain was due to the Napoleonic War in 1798. The US first introduced income tax during the Civil War.

 Taxation is constrained by the fiscal and legal capacities of a country. Fiscal and legal capacities also complement each other. A well-designed tax system can minimize efficiency loss and boost economic growth. With better compliance and better support to financial institutions and individual property, the government will be able to collect more tax. Although wealthier countries have higher tax revenue, economic growth does not always translate to higher tax revenue.

For example, in India, increases in exemptions lead to the stagnation of income tax revenue at around 0.5% of GDP since 1986. Researchers for EPS PEAKS stated that the core purpose of taxation is revenue mobilization, providing resources for National Budgets, and forming an important part of macroeconomic management. They said economic theory has focused on the need to ‘optimize’ the system through balancing efficiency and equity, understanding the impacts on production, and consumption as well as distribution, redistribution, and welfare.

They state that taxes and tax relief have also been used as a tool for behavioral change, to influence investment decisions, labor supplyconsumption patterns, and positive and negative economic spill-overs (externalities), and ultimately, the promotion of economic growth and development. The tax system and its administration also play an important role in state-building and governance, as a principal form of ‘social contract’ between the state and citizens who can, as taxpayers, exert accountability on the state as a consequence.

The researchers wrote that domestic revenue forms an important part of a developing country’s public financing as it is more stable and predictable than Overseas Development Assistance and necessary for a country to be self-sufficient. They found that domestic revenue flows are, on average, already much larger than ODA, with aid worth less than 10% of collected taxes in Africa as a whole. However, in a quarter of African countries Overseas Development Assistance does exceed tax collection, with these more likely to be non-resource-rich countries.

This suggests countries making the most progress replacing aid with tax revenue tend to be those benefiting disproportionately from rising prices of energy and commodities. The author found tax revenue as a percentage of GDP varying greatly around a global average of 19%. This data also indicates countries with higher GDP tend to have higher tax to GDP ratios, demonstrating that higher income is associated with more than proportionately higher tax revenue.

On average, high-income countries have tax revenue as a percentage of GDP of around 22%, compared to 18% in middle-income countries and 14% in low-income countries. In high-income countries, the highest tax-to-GDP ratio is in Denmark at 47% and the lowest is in Kuwait at 0.8%, reflecting low taxes from strong oil revenues. The long-term average performance of tax revenue as a share of GDP in low-income countries has been largely stagnant, although most have shown some improvement in more recent years.

On average, resource-rich countries have made the most progress, rising from 10% in the mid-1990s to around 17% in 2008. Non-resource-rich countries made some progress, with average tax revenues increasing from 10% to 15% over the same period. Many low-income countries have a tax-to-GDP ratio of less than 15% which could be due to low tax potentials, such as a limited taxable economic activity, or low tax effort due to policy choice, non-compliance, or administrative constraints.

One third of tech giants under digital services tax faced investigations by HMRC City AM 09:37 Mon, 04 Dec

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Source: H&R Block’s AI Tax Assistant Actually Seems Pretty Useful | Lifehacker

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