April 15th, Again
Fourteenth century philosopher and theologian, William Ockham is credited with introducing the problem-solving principle known as Occam’s Razor. This philosophy recommends seeking answers with the smallest number of components. Today, this approach is often paraphrased as “the simplest explanation is usually the best one.” Since we didn’t have any philosophers in my house, we relied on Uncle James’s admonition of KISS, “keep it simple stupid.”
Which brings me to the US tax code. Are you kidding me? Let me repeat, are you kidding me? Every year citizens of this fine country are forced to contribute hard earned dollars to the public cause. Personally, I don’t have a beef with the need for our government to collect tax from its population. I, for one, want my country to be able to protect us and to provide basic services. My complaint is how they do it. The annual filing of a return feels like a form of punishment; like having your wisdom teeth pulled out of your ear. Okay, maybe it’s not that bad, but it is awful.
The tax code is a joke. Years of politicians manipulating the law to serve constituents, and packing frivolous exceptions into the rules, have created a system that is unmanageable. It is telling that for a large portion of America, either a software package or an expert who spends their entire career preparing returns and working to identify tax avoidance strategies is required to file. Let that sink in. We are the most advanced country in the world, and we have constructed a system for revenue collection that can’t be adhered to without help. I love my tax accountant. He is awesome and a great person. I just wish I didn’t have to pay him every year to translate what I owe.
The US uses a progressive tax system to collect taxes. This means, in theory, as your annual income goes up, the tax rate you pay is higher. I say in theory because applying an identified percentage to your income sounds simple; but that’s not what happens. Once you figure out your gross income, the fun begins. Next there is a cadre of opportunities to reduce your income so you can settle on an adjusted gross income. Thus, people with the same income are rarely paying the same percentage of their income in taxes, as there are many variations and exceptions that impact the final number. Invest in real estate, there are rules for that; invest in a private limited liability corporation, welcome to k1s and the madness associated with figuring out your capital account, its tax basis, and what if any losses or gains count on your return; think you have business expenses, now you get to follow the rubics cube of logic to decide what is a legitimate expense versus disallowed fluff. I could go on. The list of ways a taxpayer can lower their bill, or defer their obligation is seemingly endless. The more you make and the more complex your life, the more likely you will measurably reduce your tax obligation. It is often cited how billionaires have been successful at aggressively avoiding a true progressive tax bill, because it is true. Frankly, the average person doesn’t have a chance.
I am not the brightest guy in the world, but I am not an idiot. I have spent countless hours trying to understand partnership tax rules. The time and money investment I have made in this could have been used to address a real problem, like how do I get the emails I send my subscribers to avoid their spam file. But I don’t have that luxury, I feel compelled each year to dig into what is happening to my tax return. Honestly, each year I think I get close, and then I find out that in years when there is an eclipse, I am not allowed to use passive losses; go figure, that was exactly what I intended to do. Thank God my accountant saved me before I committed some unintentional fraud.
I admit, I haven’t filed my returns in April in the last twenty years. I am always forced to file an extension. There are too many items I must collect from various entities before I file my return for me to ever be able to file the return on time. I don’t mind this. I find it fun thinking about my taxes from January to October 15th. Thankfully, it isn’t a year-round task as I usually take off November and refresh my tax energy just in time for year-end tax planning in December.
Why not impose a flat tax? Said differently, instead of a tax system that starts with gross income and then does number’s gymnastics, how about saying everyone pays X amount of their gross income? I know, the argument given is that lower income earners would pay too much in tax, and a progressive tax approach is the only fair thing. I don’t see a reason to argue that, but why not have a progressive system and a flat rate per level? Ask the politicians and they will answer by telling you how stupid the other party is. They have no desire to figure this out. They are too influenced by big dollars and the net result is the idea quickly dies. Taxes, how much we pay, where the dollars get spent, who should pay what, etc., are very volatile issues and worthy of much debate. Given the inept nature of our leaders, I don’t have confidence the items just mentioned will be resolved. Nevertheless, surely, we can make this annual task easier.
It is the only thing I know of that is so convoluted as to defy logic. Imagine for a moment if boarding a plane was as difficult. Admittedly, I want planes to be secure and I will endure some inconvenience to ensure air travel is safe. But what if the FAA followed the IRS? What if when you got to the airport you were immediately asked where you were going? People would be grouped at the front door based on destination. Then you were asked to take your shoes to a window where you waited in line to find out if they were exempt and could avoid being removed at the security gate. Having completed that, it was time to partition passengers from each other based on their jobs. Certain jobs would be treated one way in security, others another way. If you had kids with you, that would require a separate station to review any exceptions that might exist for them during the boarding process. Finished with the first phase of compartmentalization you would then need to review each item in your luggage to see if raised or lowered your ticket price. Five hours later, you would finally reach the security gate; but only with the help of a special assistant. Exhausted, confused, and overwhelmed, you would then be asked to show all the paperwork proving you had just completed the tasks you claimed to have endured.
Eventually, you reach your gate, and a slight smile develops, only to be interrupted with the thought you must repeat this process on your return trip. Regardless, you feel a sense of accomplishment and relief, but it is short-lived. Just as you are about to board you are handed a document saying your airport process is being audited and you must sit down with Mrs. Ratchet to confirm you did everything within the rules.
Ockham had it right. In the last 800 years, innovation and advancement has supported the notion that if you seek the simplest approach, the outcome will be better. It works and it can work in government; but only if there is a desire to KISS.
