It’s a great time of year to write about taxes. Many US taxpayers are struggling with a range of tax affairs – itemised deductions, W-2s, K-1s, 1040s, 1099-INTs and -DIVs, to name a few – and wondering why they cannot use all their charitable deductions and medical expenses. Many will pay more than $2000 for an accounting firm to prepare their taxes, perhaps wondering why they have to spend two days preparing an ‘organiser’ that pulls everything together for their accountant. Many in the top 0.1% slice of taxpayers will pay even larger sums of money for teams of specialists to prepare their returns, and the process will extend, by extension (Form 4868), into autumn rather than concluding in April.
Facts About Taxes
According to the Taxpayer Advocate Service, around six billion hours per year are spent preparing taxes. According to the Tax Foundation, the Tax Code and associated regulations now exceed ten million words, which compares to approximately 800,000 words in the Bible – without the good news.
The cost of compliance with the Tax Code was estimated by the Taxpayer Advocacy Service to be around $160bn in 2015, a statistic repeated in the House Budget Committee’s Government Budget for 2017. George Washington University estimates that the United States has 1.2m tax preparers, compared to 765,000 law enforcement officers and 310,400 firefighters. (If all the paper constituting the tax infrastructure were set on fire, there would likely not be enough firefighters to extinguish the blaze.)
The State of Tax Reform
Enough statistics – why this focus on taxes? The signature initiatives of this new administration are health care, taxes, infrastructure and deregulation. A new, surprising initiative in Syria may derail any or all of these. It is too early to tell. Health care has taken a step backwards, and there has been no progress on infrastructure – but deregulation has some momentum, and the new focus is tax reform.
An earlier article by this author discusses the prospects for tax reform: they are not good. The statistics referenced above suggest a powerful need for reform and raise a fundamental question about tax policy: why and what for? A great place to look for an explanation is the US Treasury’s Office of Tax Analysis. The goal is to fund the $3.69trn of outlays. This represents approximately 20% of GDP (which stands at $18trn) and is projected to grow as mandatory expenditures continue to expand automatically from 68% of expenditures in 2015 to a projected 78% by 2026.
Expenses vs Revenues
Taxpayers understand that the only means by which government is able to fund the many functions it discharges is by raising tax revenues. The political process is designed to give taxpayers the representation they need to express their views on how good a job government is doing. Accepting a democratic process necessarily requires accepting one’s political choices being rejected in favour of other candidates holding differing views. This process seems recently to have begun to unravel – a little. Reviewing the government’s budget is a necessary first step in understanding how tax revenues are spent, and what the prospects are for the future.
A quick review of the budget reveals the unsurprising truth that there is much more that can be done on the revenue side of the budget equation. In other words, since government expenses represent, say, 20% of GDP, it appears more productive to focus on increasing GDP – unless one believes that is the role of the private sector. The problem is that GDP has not recently been growing at a rate even sufficient to keep pace with the growing interest expense on government debt. As any business owner knows, incurring expenditures is a lot easier than earning revenues.
Resist – a Little
Since the majority of taxpayers do not come close to understanding the details or, perhaps, even the broad picture of the government budget, it makes sense that they would focus on something they may feel is more within their grasp: doing their taxes and, through finding deductions and credits offered up by some commercial tax software, claiming ‘their refund’. The rational approach to taxes is to underpay but not enough to generate a penalty. In this way, one avoids lending the government money at no interest. The psychology, however, is different for many. Instead, the tax refund appears as found money – enforced savings that bring a smile when the check from the Treasury hits the account. That seems like a small victory in a relationship with the government that is otherwise dysfunctional.
So people focus on taxes because, once a year, a little piece of one’s financial self may be wrestled back from the taxing powers that be, who, because the United States has a self-reporting system, entrust at least this task to the honesty and ingenuity of the taxpayer.