I recently prepared a 2000 corporate income tax return for the Mississippi Business Journal.
Even though tax filing for our little enterprise is not complicated, the experience of dealing with tax rules and regulations brings to mind how incredibly and unnecessarily complex our income tax system really is.
Why is our system so complex?
The answer is actually pretty simple. The system is complicated because it serves objectives other than merely collecting enough revenue to operate the government. These “other objectives” include:
• Using the tax system as an instrument of public policy
• Benefiting certain taxpayer groups who have “paid” to have their voice heard in Congress
• Providing work for the legend of career bureaucrats in the Treasury Department
• Combating the reality of inherent human greed
Family stability has long been considered a national priority, thus home mortgage interest is tax deductible whereas apartment rent is not. Put down roots in the community and get a tax deduction, retain your flexibility to re-locate and pay more tax. Stability is also achieved by holding investments for a long time, hence the favorable tax treatment for long-term capital gains.
To encourage well-heeled taxpayers to invest in low-income apartments the government provides tax incentives in the form of accelerated depreciation. Since having children is considered a good thing, extra deductions are allowed for each child.
Gifts to government-approved charities are tax deductible whereas gifts to a neighbor in dire straits are not. Drill an oil well and claim a percentage depletion deduction far higher than traditional accounting rules would dictate. How much do you suppose that little goody cost the oil industry in political contributions?
The mere mention of ending the estate tax (“death tax”) brings howls of anticipated pain from the life insurance industry and the non-profit sector. Coincidentally, many people buy life insurance and make charitable bequests in their wills with view to lowering their estate tax burden. Eliminating the tax would cut into business and the agony would be awful.
Hire a bureaucrat and they will generate rules and regulations. Hire a legend of bureaucrats and they will generate mountains of red tape. They can’ t help it. They’re like bears with a pot of honey; they can’t help sticking their paws in the honey because that’s what bears do. Similarly, bureaucrats write regulations; they can’t help it because that’s what bureaucrats do. Add civil service protections which makes these bureaucrats virtually un-fireable and you can kiss any hope of simplicity good-bye.
A little cheating on the old taxes makes the pain of April 15th a little more bearable. Besides, how’s the IRS gonna know whether that dinner was for business or pleasure? Kids want a personal computer? No problem. Just buy that rascal and we’ll say it was for business. How will they know the difference? In fact they won’t know the difference.
But they try to create the impression that they know the difference by requiring pages and pages of documentation showing who, where, when, etc. Of course, anyone who lies can create elaborate sham documentation to fool even the most perceptive IRS agent. Nonetheless, the paperwork hurdles taxpayers have to jump through on the way to claiming tricky tax deductions clogs the tax system.
What’s wrong with this picture? There is a perception in middle class America (where most tax revenue comes from) that the tax law is unfair and that neighbors are not paying their fair share. Additionally, there is mistrust that government is run efficiently and that, even if run efficiently, many government programs are unnecessary or undesirable. Where this attitude exists, paying taxes does not generate feelings of patriotism.
People are always calling for simplification of the tax law, but to no avail. The wood is rotten and must be removed and replaced if real progress is to take place. A good start would be to abandon the multiple roles for the tax law and just collect a reasonable amount of taxes to provide the minimum amount of government. That cannot be done with a tax on “net profit” after deductions for expenses. The devil is in the detail of what constitutes legitimate expenses. A better system would be a flat tax or national sales tax on gross income which eliminates the deduction playground for chiselers and charlatans.
Thought for the Moment – It is my hope that people will realize that it is not through the possession of material goods that one can find happiness in this world. Only by a deep involvement in the problems of the greater society can one achieve happiness or, at least, harmony with oneself. — Rita Levi-Montalcini, Italian biologist
and Nobel Prize winner for her work on cell growth
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.