With the nightmare US debt default temporarily avoided, let’s review some basics.
The budgetary responsibility of the US Congress has two parts:
1. Set spending levels (money outflow) and
2. Set taxation levels (money inflow)
Congressional rhetoric in the recent nonsense weeks mostly focused on spending (money outflow), whereas the harder but more meaningful discussion should be about taxation (money inflow).
We know this happens because neither we the public – nor our Congressional leaders – have the capacity to take on the complexity of taxes.
I mean ‘capacity’ in a couple of senses.
The first most relevant sense of capacity is: cojones. It takes political courage to engage in a conversation about taxes. It takes leadership to engage in a conversation about taxes. It’s risky to engage in a conversation about taxes. Hence: No capacity to talk about taxes.
I also mean capacity in the sense of intellectual firepower.
Federal taxes are so darned complicated at this point that we just don’t have the required gigabytes and RAM inside our skulls. The human brain 1 cannot adequately capture all the parts of our tax policy. The Federal tax code defies our understanding.
Imagine a world in which we needed to precisely legislate the movement of quarks and protons, with respect to the Higgs Field. 2
I’m picturing Harry Reid and John Boehner in a debate about the Higgs Field:
“DERR, THE AMERICAN PEOPLE DEMAND A PARTICLE ACCELERATOR WITH THE ENERGY OF 12 FLEX CAPACITORS.”
“GNNNGHHHH, MY CONGRESSIONAL OPPONENT IS BADLY MISGUIDED. PATRIOTIC AMERICANS ALL SUPPORT A MORE RAPID ACCELERATION TO RELEASE ELECTRON MASS VIA THE BIFURCATED INVERTABRATOR.”
One point is, obviously, that I know nothing about the Higgs Field.3
The other, more serious, point is that our tax laws have gotten so complex that we can no longer expect Congressional leaders to understand anything but the most simplified ideological tripe 4; nor can we, citizens and voters, meaningfully engage in the topic either, for the same reason.
We’re structurally inhibited when it comes to budget policy and discussion by the existing complexity of taxes.
Tax Complexity Paper
All of this was on my mind this week when I read this paper about “Tax Complexity, History and Humor.”
Investment advisor David Hultstrom 5 recently linked to it in his newsletter, and despite its intimidating name, there’s quite a bit of both fun and information, worth your while.
A few highlights from the paper:
The loopholes, the humorous quotes, the expert disagreement
1. Inexplicable loopholes in the tax code:
- Whaling Charitable Deduction. Code §170(n) reads: ” In the case of an individual who is recognized by the Alaska Eskimo Whaling Commission as a whaling captain charged with the responsibility of maintaining and carrying out sanctioned whaling activities and who engages in such activities during the taxable year, the amount described in paragraph (2) (to the extent such amount does not exceed $10,000 for the taxable year) shall be treated for purposes of this section as a charitable contribution.”
- Parsonage Deduction. Code §107 provides: “In the case of a minister of the gospel, gross income does not include: (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.” This income exclusion applies even if the minister receives the non-taxable parsonage allowance to cover real estate taxes and mortgage interest that the minister deducts on a personal income tax return.
- Parsonage Allowance after Retirement. Pursuant to Code §1402(a)(8) any parsonage allowance provided to a minister after retirement is not subject to self employment or social security taxes.
- Newsboys. Pursuant to Code §§3401(a)(10), 3121(b)(14) and 3306(c)(15), the earnings of certain people paid for newspaper delivery are not subject to FICA or FUTA taxes.
…you get the idea.
2. Humorous Tax Quotes:
“If Patrick Henry thought that taxation without representation was bad, he should see how bad it is with representation.”
“A society which turns so many of its best and brightest into tax lawyers may be doing something wrong.”
“For every Tax Problem there is a Solution which is Straightforward, Uncomplicated and Wrong“
“Hiring a tax expert isn’t always a help. If you give the same problem to three tax experts, you are likely to get at least six different answers.”
“A tax lawyer is a person who is good with numbers but does not have enough personality to be an accountant.” James D. Gordon, III
“Definition of a Tax Attorney: Someone who solves a problem you didn’t know you had in a way you don’t understand. “
3. And even the paid experts cannot agree:
In 2007 USA Today provided five tax preparers with a set of facts and asked each of them to prepare an income tax return. The five preparers produced five different tax results and could not agree among themselves on which result was correct.
From 1987 to 1998, Money magazine conducted an annual study in which it submitted facts to a group of tax return preparers. In Money’s 1998 report, forty-six tax return preparers had forty-six different tax results, with the tax liability ranging from $34,240 to $68,912. This was the 7th time that Money noted that none of the tax return preparers came to the same conclusion.
In an April 4, 2006 report, the Government Accountability Office noted that it submitted tax preparation information to nineteen commercial tax preparers around the US to determine how accurate their work was. Every one of the completed returns contained errors and some overlooked common deductions.
But it is not just the tax preparers who are confused. In 2002, the IRS reported that 28% of the answers given by its call centers were wrong, 12% were incomplete and 12% of the time taxpayers’ questions were not answered and taxpayers were told to do their own research.
If the tax professionals don’t know how to handle the complexity of our tax laws, what hope does the average taxpayer have?
My own attempt to illustrate tax complexity
As a thought experiment/illustration of the complexity of tax law, I created an infographic last Spring on just a tiny (but important!) portion of the tax code – the rules for making individual IRA contributions. The visual joke of course is that this little thing is extraordinarily confusing, and we wonder why more people do not fund their individual IRAs.
At the very least, do not try to do your taxes on your own, as I wrote about on tax day this year.
No solutions at this point
I have no realistic solution to offer with respect to simplifying tax codes, except my belief that the complexity itself causes bad budgetary policy. Including the kind of nonsense we all just endured from Congress.
As with investing, complexity is usually the enemy of the good. If you can’t understand it, it’s more likely you’ll have suboptimal thoughts about it, and suboptimal decisions.
Please see related posts on taxes:
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- Until a sufficient number of aliens complete a sufficient number of abductions leading to brain enhancement surgeries, obviously. But I don’t expect this kind of work to be complete until the year 2035, and SOCIAL SECURITY WILL BE BANKRUPT BY 2032! WE DONT HAVE ENOUGH TIME FOR ALIEN BRAIN-ENHANCEMENT SURGERIES! GAH! ↩
- Warning: I have no idea what I’m talking about here. What follows is merely an analogy, and a dramatic re-enactment of a theoretical discussion between our Congressional leaders. The actual Congressional debate about Higgs Boson is likely to be even more inane. ↩
- Except this! On the day Higgs won the Nobel a few weeks back, The New York Times linked to an awesome graphic illustration of the Higgs field. Ok, I confess, the entire analogy was a set-up to show off this amazing graphical illustration. ↩
- Left unaddressed here is the fact that while we lack a capacity to understand the tax code as a whole, our business and Congressional leaders are very capable of creating narrow loopholes for their narrow benefit. That’s relatively easy. So that’s usually what we get. ↩
- I have no relationship with, or info about, David Hultstrom except that I’m on his free newsletter mailing list, and that his monthly and quarterly letters are totally awesome. ↩