Monday, 3 April 2006

Read My Lips

Over the weekend I completed my last set of US tax returns (God willing!). This is an occasion for great rejoicing.

I've always found the US tax return system very poorly designed. There are so many rules, categories and exemptions --- presumably due to the sheer breadth of citizens, territories and activities the system covers, compounded by endless Congressional modifications driven by special interest lobbyists. The need for file one or more state returns along with the federal return, each with slightly different rules, exacerbates the pain. I'm never really sure that I've gotten my returns right, especially whether I've claimed everything I could have.

This situation is actually really bad. The compliance burden on the economy must be significant. But worse, it favours those who can amortize the cost of a good accountant over a large income and obtain every tax benefit available. Such a complex system must also contain anomalies --- bugs ---- at any given time that can be further exploited by those accountants.

As far as I can tell, this situation is not really fixable. The US political system is too broken for for anyone to pursue successful comprehensive reform, and in any case the system is so large and has so many requirements that it resembles one of those software systems that can never be successfully rewritten. And of course some of the big problems, such as the existence of state taxation, are constitutionally fundamental.

In smaller countries like New Zealand this is not true, and indeed, over the years there have been successful efforts to simplify our tax system. What we have right now could be improved, but it's far simpler for most people than the US system. This ability to reform and simplify is simply an advantage that I believe comes easier to small countries then large ones. Of course it's merely one part of the size tradeoff, and large countries have many advantages over small ones ... probably much greater advantages, all told.


9 comments:

  1. I'm an American and you're right. Our tax system stinks. It is ridiculously (and unnecessarily) complex and convoluted. My personal pet peeve: earned income credit. EIC is basically just a welfare program that has been shoehorned into the tax code. Why not just use that money to help fund the other programs that already exist instead of mucking up the tax system with more rules and regulations?
    Unfortunately, reforming our tax system is going to require some political consensus and cooperation. And that isn't going to happen anytime soon.

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  2. You said:
    "And of course some of the big problems, such as the existence of state taxation, are constitutionally fundamental."
    I don't really know what you mean, but the state taxation has always been Constitutional; they had to screw up the Constitution to impose the federal income tax. Some even argue that the amendment was never properly ratified. In other words, the big problem is federal income tax, not state taxes.

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  3. AnotherGuest.4 April 2006 14:17

    What a malcontent. I'll bet you tax yourselves to death in New Zealand. You obviously don't recognize what a superior system we have in the U.S. And it's so simple. We don't pay taxes. We tax our children.

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  4. AnotherGuest.4 April 2006 16:06

    Ah, you didn't get my little joke about taxing our children. Too bad.

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  5. Robert O'Callahan4 April 2006 20:53

    Ran: that's roughly what I mean. It's clear that abolishing state taxation would mean huge changes in the constitutional structure of the United States.
    Abolishing federal income tax might be appealing to some, but even if it was workable it wouldn't reduce complexity by as much, because many people would still have to file returns in multiple states.

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  6. When I hear people complain about the complicated tax system I roll my eyes.
    It took me 10 minutes to fill out my 1040 with the standard deduction.
    Am I suppose to feel sorry for you? Sounds like you have a rich-people problem.
    sheesh.. Republicans

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  7. Robert O'Callahan7 April 2006 19:53

    Perhaps you don't own a house, give to charity, have children, or have a savings account. That certainly would simplify things, but none of these are reserved to the rich.
    In fact, if you're poor it can get even more complicated, because you'll want to claim the earned income credit, and you're eligible for extra stuff like the childcare credit.

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  8. Miguel: There's something wrong with being rich? I hope that's not what you meant, because there's absolutely nothing wrong with being rich.

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  9. Good news:
    * Measured by the weight of the tax return envelope (assuming snail-mail is used), some states have very simple rules. All my Colorado returns are typically 1-2 pages, even for a business. My California returns? Don't get me started ;)
    * Even the Feds have occasionally accomplished some real simplification. Last time, I believe, was in ~1986.
    Bad News:
    Gov't here is no longer about service but about greed. Thus...
    * Federal "Earmarks" (custom laws/budget allocations for specific places) increased rapidly in recent years from a few dozen to over 14,000. [Suggested solution, which I love, at least in principle: any Federal law must follow principles that apply to all citizens.]
    * I was horrified last time I searched the Tax Code, when I discovered several whole books (on a long library shelf) containing paragraph after paragraph of laws like: "Any Orange Grove Farmer in XYZZY County, Florida, with business income between $3.5 and $3.7 million, qualifies for a tax credit of $350,000 in 19zz." No joke. Talk about system-abuse!!!!
    I see the entire tax code is now online. Ought to bring some accountability. Or maybe they found a way to hide earmarks outside the code. Dunno.
    What I found was in the paper edition in the Sunnyvale, CA library (one of two places in the USA with tax/patent/etc collections, last I heard.)

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