Friday, October 14, 2011

The "My God We're Overtaxed" and "My God the Tax Code is Too Complicated" Canard

I usually bite my tongue when it comes to the political debate because I have an extreme amount of contempt for both  parties.  The Republicans are literally off the rails on a variety of topics -- economics, global warming, family planning etc...  I mean, these people now live in a hermetically sealed world where data free points of view are espoused as if backed by noble laureates, lack of evidenced be damned.  On the other hand, the Democrats can't lead.  Even with a super-majority, they stumbled and bumbled their way for two years.  When you're running a country, that lack of leadership capability is stunningly bad.

All that being said, I have yet to see a Republican candidate put out anything beyond standard Republican dogma.  To listen to them, you'd think we were the most overtaxed country on the planet earth.  Let's cut through their two lines of argument as quickly as possible.

Taxes are in fact near historic lows:
Amid complaints about high taxes and calls for a smaller government, Americans paid their lowest level of taxes last year since Harry Truman's presidency, a USA TODAY analysis of federal data found.

Some conservative political movements such as the "Tea Party" have criticized federal spending as being out of control. While spending is up, taxes have fallen to exceptionally low levels.

Federal, state and local income taxes consumed 9.2% of all personal income in 2009, the lowest rate since 1950, the Bureau of Economic Analysis reports. That rate is far below the historic average of 12% for the last half-century. The overall tax burden hit bottom in December at 8.8.% of income before rising slightly in the first three months of 2010.
Then there is this chart from Reuters:

Regarding the tax code and its"complexity," let me add my professional .02 cents (inflation adjusted).  First, I have a masters in domestic and international taxation from the Thomas Jefferson School of Law where I graduated Magna Cum Laude and am currently a doctoral candidate.  I am author of the leading book in the area of Captive Insurance Law.  Tax law is the area of law in which I practice every day, so let me offer some evidence from someone who actually does this for a living:

1.) The tax code is not that complicated for the vast majority of Americans.  It's just not.  If you make below, say, $100,000 and you use a standard tax preparation software, you're not missing any deductions.  Really -- you're not.  I realize the time involved with putting together your taxes is a pain, but, frankly, the do-it-yourself software is actually pretty good.

2.) If you're a high net worth individual, you can afford the services of a professional.  That's part of the joy of being a high net worth individual -- discretionary income.

I'm actually one of the few individuals who has read the vast majority of the tax code and the accompanying regulations.  While it took me several years to do so (that's what graduate school is for), that's also the case with vast swaths of the law.  Have you ever looked at the property code in a North East state that also has 300+ years of legal precedent to research?  Length of legal code is one of the side effects of a common law legal system.  Deal with it.

That being said, the tax code is long for two primary reasons.  First, is special interest giveaways.  There are entire chunks of the code that are sops to special interests.  For example -- anything related to natural resources was written by and for the oil and timber industry.  Second, there are anti-avoidance statutes.  These are laws that were put in place because someone tried to find their way around a nice, plainly worded statute.  For example, about 2/3 of the corporate tax code   (Subchapter C) is anti-avoidance in nature.  The vast majority of the estate code falls under this guise as does the CFC (controlled foreign corporations) act.  In short, people getting cute is a primary reason for the code being complicated.  Also note -- the sections I've just cited probably won't have an impact on the vast majority of US taxpayers.  In short, about 50%-60% of the code deals with special interest giveaways and anti-deferral rules that were written to plug holes in the code.

In short, the "we're being taxed to death" and "the tax code is too complicated" arguments just don't stack up.  First, taxes are near historic lows.  That means we're not being taxed to death.  Second, for most individuals, the tax code's complexity has absolutely no effect on their tax computations: that which was a deduction last year is a deduction this year.  Now, if you're terrible at keeping records and scramble every year near tax time, maybe you need to change your financial organization habits. Finally, if you're a high net worth individual, you can afford a professional help. And finally, the basic tax code -- gross income, deductions, taxable income etc... -- are pretty standard.  You run into complexity issues on special interest giveaways and plugging of loop-holes -- and, again, this is an area that most taxpayers (as in 95%+) won't even see.