Monday, March 01, 2010

Why Taxes Are Complicated

I'll admit it: I ran into a tax problem today that really threw me for a loop.  I just spent the last hour trying to figure out why my tax software was insisting that one of my clients didn't owe as much in taxes as I thought they would.  And I drilled down, looking through the tax worksheets, and then worked them out manually.  And then I got it: Capital Gains are taxed at a much lower rate than other forms of income and this guy sold a bunch of assets and therefore had a ton of Capital Gains.  Yet, when looking at his Taxable Income, I was thinking of the standard tax rate; not the Capital Gains rate.

And so, yeah, sure, the tax code can be complicated, even for us professionals.  But the problem here isn't that the IRS is evil, but because tax rules are written by politicians and politicians have different interests in mind than making things logical.  Plus, it's written with a lawyer-mentality, to make sure people can't abuse the system by intentionally misinterpreting the rules.  And the people who complain the most about the complexity of our tax code are the very reason why they're so complex: Because these bozos are looking for any loophole they can find, and then get frustrated when they can't find any that help them.

And in the end: The tax software knew what to do, so it really wasn't complicated.  While I'll never accept the software's judgment when I don't understand what it's doing; I've found that most discrepencies are human error.  And while I've had a few exceptions when the software wasn't capable of handling a specific incident, forcing me to fight with it to figure out how to get something entered; those are always the rare events that software developers couldn't have anticipated.  Anyone who runs into these sort of problems should hire a professional anyway, while most people don't need one.

And of course, that's why taxes are so complicated.  As with most things in life, 5% of people create 95% of the work.  For as much as people rant against the size of the tax code, most of it won't ever apply to these people.  But our economy is complex enough that we need all those rules anyway.  Thank god for the tax software.


mahakal said...

It could be simplified. Tax land values, collect the rent for the government. Tax corporations on all of their activities. Pay a dividend to the citizens, a guaranteed annual income. Make hemp currency. It's all good.

Doctor Biobrain said...

Yes, and then reality set-in and remembered that we're in an epic struggle merely to make minor changes to how our healthcare services are funded, and couldn't possibly handle a radical change that would completely upend our entire society. Yes, I'm sure everyone would LOVE to be told that they're now paying rent to the government for land they already own. That won't cause a civil war or anything.

And if anyone could ever explain the advantage to taxing corporations, I'd love to hear it. It just makes them charge higher prices and your "guaranteed annual income" would most definitely be sucked right back up again. Or were we supposed to imagine that corporations and land owners would pay taxes through magic money that wasn't collected through higher prices?

mahakal said...

You really should familiarize yourself with the concept of economic rent. Collecting rent does not raise prices, as the total rents do not change, only where the rents go. In fact, by taxing fallow land and bringing it into production or competition, such taxes will tend to lower prices. Again, you need to familiarize yourself with the economics of rent.

Anonymous said...

The tax code should be abbreviated.

It is 60,000 pages long and cannot fit on a person's desk or even inside a normal office.

Even if 99% were shaved off, it would make a challenging 600 page read.

State tax codes on the other hand, are ordinarily much smaller. The state of Maine publishes its code as a 743-page PDF.

If a state can get by with such a small set of tax laws, the federal government should be able to do so as well.

Our national politicians just have no excuse for the crap that they produce.

mahakal said...

Regarding your "magic money" remark, you should reread my first comment again more carefully, and see that land can produce the currency to pay the tax directly.

Doctor Biobrain said...

And you need to familiarize yourself with the concept of civil war and the destruction of any political party who'd suggest that the government should steal everyone's land; forcing them to pay rent on land they already paid for.

And look, I really do enjoy debating this kind of stuff, as I find debate to be an excellent way of honing one's mind; and theoretical debates are the most fun, as I already have all the answers to the day-to-day stuff. But you sending me on wild goose chases in order to research your claims is just lame. I'm sorry, I'm interested enough to get into a debate, but not interested enough to actually do research. Or, in this case, do MORE research, as I already researched this last time it came up and was totally underwhelmed.

I'm a practical man who prefers real world options and any policy that would start an armed revolt in this country isn't one I'd consider particularly practical; especially as I'm a believer in land ownership and would probably side with the revolters. The idea of making us all sharecroppers to the government sounds horrible to me.

Now, if you've actually got some numbers to back up your claims, then we're talking. You suggest that you've shown me that "land can produce the currency" whatever, well, I want to see your proof. Assertions are worthless. Numbers, I can work with. And this "you need to research" jazz is for the birds. I'm working on tax returns right now and am doing all the research I care to do. Diversions I need; research, not so much.

Doctor Biobrain said...

Yes, Anonymous, we really should devise a physical limitation as the guide to our tax code. Would it count if they wrote it really really small, or is there a font limitation here as well?

But of course, almost no one reads the tax code. The IRS has interpretations that tax experts read, and those tax experts put out advice, prepare returns, and develop tax software for regular people to use. And 99.9% of folks find it perfectly adequate to read the instructions included with the tax forms, which are written in plain English and aren't particularly long. But you don't care about that. You just want to bitch about how long the tax code is, because that's what the people who tell you what to think told you to say. Brilliant.

mahakal said...

You don't read, apparently. I said to make hemp currency, and land can produce currency. How much proof do you need of that? Anyhow you obviously don't care to read or consider anything but your precious tax code, so have fun with your job.

Doctor Biobrain said...

"I said to make hemp currency, and land can produce currency."

Was that meant as a joke, or what? I guess using hemp as currency would work, as you'd fight the inflationary effect of allowing people to grow their own money as all the stoners smoke up the cash supply. That makes perfect sense. Unless, of course, you're referring to the non-THC kind of hemp, in which case you've lost me again.

And what's up with your missing comments? I get them in my email, but they're not showing up here. Did you make them out of hemp too?

And no, taxes aren't fun. I like the problem-solving aspects of bookkeeping and data entry is like a form of meditation for me, but taxes require actual brain power. That's why I need the diversion.

BTW, you're a really sucky debate foe. I hope you realize that.

Anonymous said...

Actually, the tax code really is overcomplicated by its size.

A typical taxpayer's bottom line comes from a Rube-Goldberg machine of computations and judgment calls, each of which often affect a person's outcome by hundreds of dollars.

There is such a thing as a simple federal tax situation but it is uncommon. Americans in this situation are not married, have no children, do not inherit anything, do not invest, do not operate a business, and do not own a home. This is the price that you have to pay for simple taxes.

If taxes are really so simple for 99.9% of people, then the average cost of a tax return would not have reached $200. That is definitely a signal of a problem.

Doctor Biobrain said...

A typical taxpayer's bottom line comes from a Rube-Goldberg machine of computations and judgment calls, each of which often affect a person's outcome by hundreds of dollars.

Anonymous - If that's what you think, you're either so stupid that you weren't aware of the existence of tax software or you're just repeating someone else's words.

But there's nothing particularly complicated about being married, having kids, or owning a home. And the only reason those things are included is because the government is kind enough to allow us extra deductions for these items. But modern tax software makes these issues super-easy, so I can't imagine why you think there's anything complicated going on here.

Similarly, business taxes are more complicated because the government allows us to deduct our expenses. I'm not sure why you people imagine tax deductions to be evil, but I'd rather pay less taxes than more. And businesses would still need professional help, whether we taxed property, sales, or whatever. Trust me, federal income taxes are just a small part of my job.

Anonymous said...

Doctor Biobrain, you have a good point about the computers. The point is that if you want a tax return, a computer can readily make one for you.

That does not mean, however, that the credits and deductions taken will be appropriate under the law or that the taxpayer does not miss thousands of dollars in eligible savings.

The computer programs are designed and marketed for people who want the process to be simple. To this end, the programs are likely not to ask the user every appropriate question for the tax laws being invoked. The IRS makes the filer of the tax return responsible for everything, even if the tax preparer or the software contributes to an error. It's all caveat emptor.

The assessment of taxes has become so vague that it is, today, something of a diplomacy. Annually, every taxpayer, through an opus of personal accounting and selective interpretation of laws, will propose to the government an amount of money to owe or be owed. If you are paying enough money and following enough rules, the government will probably agree with you. If you are too creative and "stingy" with the government, you will probably be audited.

One good piece of consolation that taxpayers have is that the IRS may not dispute a tax return after it has been filed for three years, unless they can demonstrate that it was filed with an intent of tax evasion.

But I would still like there to be fewer laws and more predictable taxes.