Complexity a Boon to the Powerful

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,

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.

but we often fail to note some of the other outcroppings of this fact.

Ah, I see: your peers are indicative because facts outcrop in them, and also in our legal and tax systems.

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.

Our legal and tax systems, too, become denser with each passing day,

Not really, right? This is just rhetoric, without any desire for accuracy, isn't it?

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.

Unlike a simple system, such as the flat tax?

Legal System

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.

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

-- By JohnJeffcott - 26 Feb 2010