Why Are Income Taxes Complex?

The “guide” to fill out a personal return is 78 pages for 2018. Who will use that? No one. They will use tax software packages or paid preparers. The cost of either is straight out of pocket and an additional burden.

Should taxes be complicated?

What happens when you go to the gym and try to do too much? You hurt yourself. Same thing with taxes.

  1. If taxes only raised revenue for the government, they would be far simpler. Instead they try to be perfectly fair. They turn out to be complex to address a problem that barely exists.
  2. Progressive would remain? Probably not. Progressive taxes are said to be about fairness. Does that work? Not really. High income taxpayers have flexibility and they use it to minimize their burden. Move to a lower tax jurisdiction. Amend their earning structure. Stop earning. All have been used and all will be used again.
  3. Once you decide fairness is crucial, even though you can’t define it, problems begin. Fairness is an illusion. Should a business be taxed at lower rates than a person? Maybe. They have more risk and governments don’t share in the losses or the accumulation of capital. By the same argument, why are interest and salary taxed more heavily than other income types. Because they are easy to keep track of and, absent other variables, people tend that way. A large share of the population prefers to be an employee and earn predictable income. They are natural victims.
  4. How do you police it? Most people would like to pay less tax. Some will cheat to do it. Discovering cheaters is not as easy as you think. I had a client once who owned a large coin laundry. He was a little careless counting the quarters. Eventually the tax auditors appeared and decided to find out what revenue should be. Several in line water meters. A stack of quarters and run about 10 loads in each machine. Various sizes, various rinse cycles and all that. Decide the average water usage per load. Find the water bill. Looks like there should be this many quarters. According to the client, they were surprisingly close. Most businesses have ratios or indicators that revenue is missing. I think I could sit in a restaurant for an hour, review the menu, examine the financial statement and decide if it was reasonably close to actual revenue. Successful cheating is usually not about skill, it is the result of being undiscovered.
  5. Do tax incentives work? Sometimes but seldom. Usually they just cover up some tax disincentive. If the act is to raise money, why do you need incentives and disincentives? Because politics works that way.

Everyone makes the same mistake

The American tax code is, surprisingly, more complex than Canada’s. Years ago, Steve Forbes pointed out that a flat rate of 17% on family income over $40,000 in a year, would raise more revenue than the current system of income tax, estate tax, and miscellaneous taxes.

Did they immediately switch? Of course not. Taxation is about poltiics not common sense.

Do not expect simple.

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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