| |
| META TOPICPARENT | name="FirstPaper" |
|---|
| |
<
< | Complexity a Boon to the Powerful | >
> | Concern About Tax Code Complexity | | | | |
<
< | If my peers are any indication, it is a given that our government has become significantly larger and more complex over the past century as a result of the increasing complexity of everyday life, | >
> | Our government has become significantly larger and more complex over the past century to accommodate the growing needs of an industrial nation. The legislature has so much to attend to it must delegate much of its work to regulatory agencies. It should come as no surprise, then, that our tax code has become fraught with unnecessary complexity as the legislature struggles to keep up with all the issues it must address, and at what cost to ordinary citizens? There are those who would claim there is no cost—we combat this complexity with increased specialization. They miss the point. Only the wealthiest among us are in a position to procure the assistance of all this specialized help. The result? Complex systems such as the tax code tend to favor those in power. | | | | |
<
< | I don't know how your
peers indicate largeness, or complexity of either government or
everyday life. Not by being large themselves, I suppose. Their
leading complex daily lives might be indicative, I guess, but how
that would indicate the largeness or complexity of government I don't
see, unless your peers are large complex government workers, with
complex daily lives, led indicatively, whatever that would mean.
| >
> | This is not to say that any simple system will change this fact. A pure flat tax, though immensely less complicated than the current tax code, would in all likelihood cost the average working person more money (or require large cuts to government spending). If the government chooses a tax rate low enough not to jeopardize the financial safety of families with lower incomes, it will not receive as much from the nation’s wealthiest citizens, creating a whole set of new problems. | | | | |
<
< | but we often fail to note some of the other outcroppings of this fact. | >
> | Complexity in the Abstract | | | | |
<
< | Ah, I see: your peers
are indicative because facts outcrop in them, and also in our legal
and tax systems. | >
> | The tax code is not getting simpler. The Federal Standard Tax Reporter more than doubled its page count between 1984 and 2003, surpassing the 50,000 mark. Though this includes various IRS rulings, still the sheer size of the tax code is overwhelming. Concededly, real GDP also nearly doubled in the same time frame (http://www.measuringworth.org/usgdp/), but it is not clear why more money would necessitate more regulations. | | | | |
<
< | I know what a rock outcropping is, where—usually on a
hillside—soil cover is eroded sufficiently to expose the rock
surface beneath. An outcropping of fact, I take it, occurs when
rhetoric insufficiently covers them. | >
> |  | | | | |
<
< | | >
> | The result of all this has been the same for some time—only the wealthy can afford the necessary help to understand (read: exploit) the tax system properly. Certainly it is the wealthy who have all the incentive to hire tax lawyers anyhow, as they are the ones with money to gain/lose, where many working class individuals would end up spending more on tax advice than they gain from taking it. The question is not how to change this fact (it will always be the rich who have the incentive to hire tax lawyers), but how to make tax lawyers less valuable. Theoretically, if the tax code was simplified to an unrealistically extreme extent, everyone, tax lawyer or no, would be on a relatively level playing field. Though obviating the need for specialized tax knowledge is probably not on the horizon, there is room to work in that direction. | | | | |
<
< | Our legal and tax systems, too, become denser with each passing day, | >
> | Consider that just a couple months ago, the Los Angeles Times reported that Frank and Jamie McCourt? , owners of the Dodgers franchise, earned approximately $108 million between 2004 and 2009. Now stop; in your head, estimate what you think they paid in federal and state income tax or what you think they ought to have paid. They didn’t pay any. Through the amazing science of carry-forwards and deductions, the McCourts? managed to pay zero tax on $108 million. (LA Times) | | | | |
<
< | Not really, right? This
is just rhetoric, without any desire for accuracy, isn't
it? | >
> | More Specific Complexity | | | | |
<
< | and at what cost to ordinary citizens? There are those who would claim there is no cost—we combat this complexity with increased specialization. They miss the point. Only the wealthiest among us are in a position to procure the assistance of all this specialized help. The result? Complex systems such as American law and the tax code tend to favor those in power. | >
> | If that rubs you the wrong way, consider now Warren Buffett, a figure who needs no introduction. In 2007, he noted publicly that he is taxed on a smaller percentage of his income (17.7%) than his receptionist (30%), and this without trying to avoid paying higher taxes. He proceeded to bet a million dollars against the rest of the Forbes 400 if they could show that the same wasn’t true of them and their receptionists. No one showed any interest in the wager. (Washington Post && CNBC) | | | | |
<
< | Unlike a simple system, such as the flat tax? | >
> | This fact stems in part from the way our tax code distinguishes between types of income. Income received from long-term capital gains (investments held for over a year) is taxed at a significantly lower rate than earned income, the worker’s income. The problem, of course, is that the poor are not the ones with capital to invest. Those whose incomes are high enough to fall in, say, the 35% tax bracket, generally have enough capital to profit from investment rather than labor. Instead of being taxed 35% on the money they earn by doing so (which would seem natural if we were to believe that those with greater means should bear a proportionally larger chunk of the tax burden), they are taxed only 15%. For comparison, in 2008, 15% was the tax rate that applied to single individuals earning between $8,025 and $32,550. The effect is essentially to create a subsidy to the rich and facilitate the ability to live on passive income. | | | | |
<
< | Legal System | >
> | "Change" | | | | |
<
< | The first problem with America’s legal system, without a doubt, is the source of motivation for new legislation: interest groups and lobbyists. The well-established have the resources and every incentive to push for legislation aimed at protecting their own interests. But for the scope of this paper, let us imagine we are only dealing with laws written by an even hand. | >
> | All of this isn’t lost on those in power. The Tax Reform Act of 1986 greatly simplified the tax code by consolidating brackets and reducing the number of deductions and taxed capital gains at the same rate as ordinary income. Since then, however, capital gains taxation rates have only declined, first to a maximum of 20%, then to a maximum of 15%. In part this is the result of the efforts of those who stand to gain from a lower capital gains tax (i.e. the rich), who, because of their greater means or determination or both (after all, greater means = more leisure time = more time to pursue political ends) are better able to represent their interests in the political process. A sort of policy circle has been created whereby the powerful endorse these complexities that perpetuate their power under the guise of encouraging investment (as if encouragement was needed). | | | | |
<
< | Even then, the law would tend to favor the wealthy, because they have access to the best—most expensive—representation. Certainly this is the case with celebrities and corporations. I will try to avoid casting guilt on parties the courts saw fit to acquit, but I suspect any reader can call to mind some celebrity who, though officially acquitted, they believe was guilty. The same can be said of corporations and their executives; or at least it can be said that they get off with relatively light punishments with respect to the financial enormity of many of their crimes. Consider Charles McCall? , a former chairman of McKesson? Corp., who was finally convicted of securities and accounting fraud (involving nearly $9 billion) after ten years and multiple trials. His sentencing is set for next week, so keep an eye out and decide if you think the punishment fits.
As though anyone who
hadn't studied both the offender and the offense would know what
"fits." And what has a criminal sentence to do with complexity? Is
it that the criminal code is complex because the powerful have made
it hard to convict them? Is it that the poor are trapped by complex
offenses that are simpler penal code would protect them against
having to answer for violating? Or is this all one big red herring,
a smoked fish drawn across the trail to confuse hounds?
Tax System
Our system of taxation, if anything, is worse. The Federal Standard Tax Reporter more than doubled its page count between 1984 and 2003, surpassing the 50,000 mark (1).
What is the point of
footnotes on a web page? Make links out of them. Is that the result
of twice as much tax law, or twice as much
money?
The result of all this has been the same for some time—only the wealthy can afford the necessary help to understand (read: exploit) the tax system properly.
Why would anyone other
than wealthy people want to spend money on tax lawyers in any system?
What system of tax law would not leave rich people with an incentive
to hire tax lawyers?
Just two days ago, the Los Angeles Times reported that Frank and Jamie McCourt? , owners of the Dodgers franchise, earned approximately $108 million between 2004 and 2009. Now stop; in your head, estimate what you think they paid in federal and state income tax or what you think they ought to have paid. They didn’t pay any (2). Through the amazing science of carry-forwards and deductions, the McCourts? managed to pay zero tax on $108 million.
If that rubs you the wrong way, consider now Warren Buffett, a figure who needs no introduction. In 2007, he noted publicly that he is taxed on a smaller percentage of his income (17.7%) than his receptionist (30%), and this without trying to avoid paying higher taxes (3). He proceeded to bet a million dollars against the rest of the Forbes 400 if they could show that the same wasn’t true of them and their receptionists. No one showed any interest in the wager (4).
And? The difference
between capital gains taxation and the taxation of earned income is a
staple of left irritation. It was essentially eliminated in the 1986
tax reform act championed by Ronald Reagan and Bill Bradley, and
reemerged when the Republican Party under Newt Gingrich made tax
benefits for capitalists their counterweight to Clintonism.
The only way to make these facts sensible is to remember that the most powerful have the best accountants.
No. It's a specific
subsidy to the rich and to the securities industries. Everyone knows
it's there, and everyone knows why.
And when this logic is adopted in a more general context, we’re left with the feeling that the more complex a system, the more it will inevitably tend to favor those with the resources to navigate it effectively.
The distinction between
ordinary income and capital gains is the root of an overwhelming
proportion of the complexity in the tax system, because if you tax
one kind of revenue half as much as you tax another, there will be
overwhelming desire to turn the expensive kind into the kind the
government lets you keep. People without investment capital, those
who sell their labor, have no choice what kind of income to get. The
complexity arises from the efforts of the tiny proportion who can
benefit to do so. You can blame this on the advantages of being
powerful, but you are mislocating where the advantages are, and
whether the complexity is the cause or the effect of the
advantage.
Feasibility of Change
I am no tax lawyer, accountant or judge, and if they don’t have the answer to these problems, I can certainly make no strong claim to that end either. But I would endeavor at least to think about what possibilities are open.
In order to do which,
you might find it useful to know something about the subject. You
could have learned as much as you needed to write this essay, but you
didn't.
Individual
This class should be no stranger by now to the idea that, as individuals and future-lawyers, one of our greatest strengths is in our ability to choose our clients. Forfeiture of this strength, though it guarantees no evil, almost inevitably ensures working for the clients who pay best—the McCourts? , McKessons? , McEtc? . And despite the creed of free-market capitalism saying otherwise, pursuing the interests of such individuals is often not in the best interest of society generally. Change from the individual level up, then, depends on the effective use of our particular specialization for the purpose of assisting those that need or deserve assistance rather than those that best compensate us for doing so. Unfortunate as it may be, I am not so idealistic that I think this solution likely on any significant level, as it runs counter to what, for simplicity’s sake, I’ll call “The American Dream.”
Collective
The real answer, I believe, is the one that is most obvious: Simplify. Somehow, despite instinctual and expressed desires to simplify, it never seems to happen.
I've already explained
that it did happen, and then unhappened, because fewer people cared
about the immense increase in simplicity than they cared about
lowering taxes on the rich and "encouraging investment." Not to
mention helping the securities industry.
Return to the tax code. Congressmen were (ostensibly) advocating simplification of the tax code as recently as three days ago (5). And yet, even with this persistent pressure, when is the last time you can recall the tax code actually being simplified?
I've told you when, and
you could have found out for yourself, had you
looked.
Instead, the opposite occurs. The Alternative Minimum Tax (AMT) was introduced in 1969 to target 155 high-income households that managed to avoid taxation through large numbers of exemptions. Now, according to the Congressional Budget Office, “in 2010, if nothing is changed, one in five taxpayers will have AMT liability (6).”
Yes. Because no one was
politically willing to raise taxes, it was always easier to allow
revenue gains to occur by not replacing a mechanism that was
gradually becoming much more fiscally useful.
Instead of making the tax code easier to understand, Congress has managed to make it even more intricate for up to 20% of taxpayers without even the intent to do so. Unless they also accidentally simplify it, I suppose we’ll have to wait for someone to properly incentivize a simplification movement, because absent even greater change, incentives—money, power—are what get work done.
Not that you have
anything particularly new to say in this conclusion, but a trifle of
additional historical accuracy would be
useful.
1.
2. http://www.latimes.com/business/la-fi-hiltzik24-2010feb24,0,5865964.column
3. http://www.washingtonpost.com/wp-dyn/content/article/2007/06/27/AR2007062700097.html?hpid=sec-politics
4. http://www.cnbc.com/id/21708265
5. http://online.wsj.com/article/SB10001424052748704188104575083432091547738.html
6. http://www.cbo.gov/doc.cfm?index=5386&type=0 | >
> | That the tax code reverted back indicates too little concern about the code’s simplicity. It’s our role (at least if we choose it) both as citizens and as future lawyers to help represent the interest of those the political process tends to marginalize or ignore. Just as some may benefit from the good advice to abandon an underwater mortgage, many others could benefit from practical advice about what existing tax regulations or tax changes to endorse. | | |
-- By JohnJeffcott - 26 Feb 2010 |
|