The Complication of Taxation

There are two main ways in which the government hurts business: regulations and taxes.
Nonsense regulations make businesses—large and small—jump through hoops to make sure that all the “t”s are crossed and all the “i”s dotted for licensing, rules, and procedures. For taxes, money that could be used to reinvest in a company is instead brought under the government’s jurisdiction, where it falls victim to widespread inefficiency and red tape.

Regulation and taxes used to be two separate issues, but recently they’ve become more and more similar. This isn’t because old conservative pundits groan about them both, but because they’re slowly becoming a connected problem.

The ridiculous tax code isn’t just a financial burden anymore. It creates a bureaucratic nightmare that firms experience every April. Our regulatory process is a tax in and of itself because of the expenses firms must dole out to deal with it.

In other words, the costs of taxes have increased as businesses spend more money to work the system and pay those taxes, while the costs of regulation have spread to taxes, creating a system where firms do more work for no reward. Much of the time, business owners simply grumble about this work and keep their heads down. But during this time of the year, when these two monsters rear their ugly heads, the public at large begins to grumble.

It’s tax season, every adult’s nightmare. Everyone who has an over-the-table income understands the plight of filing taxes and attempting to understand the odds and ends of the tax brackets and the different tax breaks. And the system doesn’t get any better as we age. The older we get, the more complex our assets become. We earn enough money to differentiate our investments, we buy property, we start businesses, and we donate to charities. Each individual action has its own nuances, and the savvy financial mind can wind through the path that allows him or her to keep the most of their money. But most of us don’t have that kind of mind, let alone that kind of time.

Here’s a brief breakdown on how extensive our system is. According to the Internal Revenue Service, there are three main parts of our tax code: the Internal Revenue Code, the Treasury Regulations, and a section for other tax code information. In order to read, say, the Internal Revenue Code, the taxpayer must select a subtitle, chapter, subchapter, part, and section to find one specific area of the tax regulation, leading to over 70,000 pages of code across the board.

In my last column, I wrote about how important it is to understand practical finance, but when it comes to taxes, attempting to understand our system becomes an impossible challenge. While asking everyone to understand the basics of the stock market is reasonable, asking everyone to understand the American tax code is too much. One person’s taxes may consist of multiple foot-thick stacks of papers, and it’s gotten to the point where many simply pay accountants and lawyers to crunch the numbers and check the rules because it’s impractical for a layperson to even try.

Congress continues to make new rules and exceptions, which, for those select few who benefit, is great, but for the most of us, make the system more complex. Making reasonable changes to the tax code often becomes a partisan battle, and the lobbying of the accountants who benefit from a Byzantine system makes it even harder.

I’m not saying that these regulations and taxes should just disappear in an extreme libertarian sense. Upton Sinclair did some great work, and I’m glad that we have the FDA to make sure that we actually know how the sausage is made. Taxes aren’t evil—they serve a practical purpose. Federal roads and a uniform system for marking those roads has helped virtually every industry and field in the nation.

There are more effective ways to administer the system. Some conservatives argue for an across-the-board flat tax. The reasoning behind this system is a logical mathematical process. Under a 10 percent rate, those who earn $10,000 a year pay $1,000 in taxes, and those who earn $100,000 pay $10,000 in taxes. People who earn more, pay more.

Personally, I don’t agree with the flat tax system. It makes the assumption that money is worth the same amount to people in different income brackets. I find that the quality of life of the taxpayer who loses $1,000 of his or her $10,000 likely drops much more than the taxpayer earning $100,000 and paying $10,000. As citizens become wealthier, this becomes even truer. A billionaire can still buy a yacht after losing a few million dollars, or a couple percentage points of their income. For a family earning $100,000 and trying to pay for college, however, those couple of percentage points have a much larger effect.

That’s where the widely accepted progressive tax system comes into play, where those who earn more pay a higher percentage. That’s rational, and that’s what we have now, but extra add-ons and exemptions make this system far more complex than it needs to be.

If we can figure out a way to simplify the tax code—a nonpartisan endeavor—then we will make our workforce more productive. Of course, limiting regulations and lowering taxes would also help, but with a divisive political field, simplification is one task that we can readily achieve. We’re losing millions of hours of productivity administering an internal service. We should be using human intellectual energy to invent new machines, cure diseases, and write programs, not to shuffle paperwork and learn tax jargon.

Featured Image by Meg Dolan / Heights Editor