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Help me explain the tax code
Rotiart
Registered User regular
Registered User regular
I have a friend I am trying to help understand why US tax code is as complicated as it is. I have absorbed a reasonable understanding of why, but have a hard time explaining it to him. Is there a good resource out there I can use to help explain this? I don't need anything too in depth, but my Googling is finding way more anti-tax wingnuts than anything useful.
Thanks!
Thanks!
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the simplest possible answer I can give to why the code is the way it is is because tax loopholes, exemptions, and credits are the simplest, least controversial way the federal government has of influencing the behavior of its citizens
a practical example
it would be utterly ridiculous for the government to make a law declaring that all families must have children
however, you can charge people a certain tax rate, and then if they decide to have children, you give them relief from that tax rate
this happens allllll the time for individuals, families, and companies.... and it slowly piles up over the years until we have an unknowable mess
we also talk about other random shit and clown upon each other
I can only speak for the Canadian tax system, but the idea is likely the same. It starts off pretty simple: pay X% tax rate on your income. More income = more taxes. However, the government puts incentives out there so if you spend your money a certain way, or make your money a certain way, then you get credits and/or preferential tax rates. Every time there is a new incentive, new rules have to be put in place. And when there is a rule, people will try to bend the rules. So then MORE rules need to be put in place.
Example! In Canada we have a "Child fitness tax credit". Essentially, if you pay to put your kids into sports then you can claim the expenses (up to a certain $). The idea is that kids are getting too fat so let's encourage exercise. Makes sense. But...now you need to define what makes an appropriate "fitness" program. And what if a program is part sports and part arts (like many community rec centres offer). Does sending your kid to Summer Camp count? I mean, the kid will probably run around and stuff there. So now you have what seems like a pretty simple tax credit and its suddenly requires various rules based on many different interpretations of "fitness".
And that's just a simple tax credit for individuals. Nevermind complex finance transactions for multinational corporations, or something of that nature.
But as Jasconius said, tax policy is a great tool for the government to influence its citizens behavior and has slowly grown into a complicated mess over the years.
the basic structure of a progressive income tax is easy to explain (although people still get that wrong because they don't understand how tax brackets work), and once you get past that and past a few other types of income that are taxed differently (dividends, carried interest, etc) the tax code is essentially just a collection of policy levers that government(s) use to incentivize certain behaviors (we want children to be provided for, thus child tax credit) and disincentivize other behaviors (we don't want people to smoke, thus cigarette tax)
in general somebody who wants to argue that 'the tax code is too complicated' without additional qualifiers almost certainly doesn't know what they're talking about and only wants to use that argument as a talking point because they think (for ideological preference reasons, which are fine, but still) that we should have a flat tax or a national sales tax or whatever.
that's why we call it the struggle, you're supposed to sweat
In my tax classes, the professors used to joke that the reason the tax act is so complicated and long is because of tax lawyers. That if it were written by accountants it'd be two pages long.
But again, that's accountants talking, so take that with a notable mound of salt.
Personally I'd explain it like this:
The reason it's so complicated is that courts have tended towards valuing the word of the law over the spirit of the law when it comes to taxes (At least in the U.S., canada less forgiving about that (the canadian federal tax code is ~2,000 pages, while the U.S. federal code is in the 74,000 + range)).
Like, it's against the spirit of the law that someone making decent money pays no/next to no taxes, but if it can be worked out while following the word of the law, they'll get away with it.
That means the word of the law has to change, and by change I mean get more complicated. It's all to close loopholes.
Which inevitably ends up opening new loopholes.
Which then have to close.
And suddenly you have thousands to tens of thousands of pages in your tax acts.
Always remember that the people who are paid $texas to break the tax code are at least as smart as the people making it.