Working on my taxes this weekend, which is no fun. I’d rather be blogging. Recently read T.R. Reid’s book on taxes, aptly titled: A Fine Mess (affiliate link). If you’ve read any of his previous books, you know he is a pretty expansive thinker, willing to take on super-macro topics. The last book I read was The Healing of America (affiliate link) where Reid analyzes the four different types of health systems you find globally. It reiterates the hard truth that the US does not have a healthcare system, it has a sick-care complex. It’s a patchwork of not-so-intelligent design, mixed with poorly-structured incentives. A Fine Mess (tax book) tackles a topic just as byzantine and frustrating – US taxes. In Reid-style, he investigates how different countries handle their taxes, and asks some great questions:

Why is tax preparation so time-consuming?

• Reid notes that the average American making $55K annually, takes 30 hours to gather documents and file their taxes. In the Netherlands, by contrast, an executive making six figures will take 15 minutes.
• Even the IRS estimates that the opportunity cost for individuals and companies to file their taxes is 14 cents of every dollar collected; if the IRS gets $100, it cost taxpayers $14 of their time to file. They note that if tax-compliance was a stand-alone industry it would employ 3.7 million people.

Question – why does it take so long to file US taxes? Answer – the tax code started out as 27 pages (1913) and is now 9,000 pages. That’s a 330x increase in size, complexity, and (often) nonsense.

Who is creating this complexity?

• Congress. This is a non-partisan thing to say. Even the Internal Revenue Service (IRS – the folks collecting the money) begged Congress to stop making so many changes here.
• Between 2001 and 2012, there were 4,600 changes to the tax code; more than one a day.
• Dr. Cogburn, a retired US senator, is a tax reform advocate and his team published a 300+ page manifesto called the Tax Decoder here (12Mb pdf) which takes a consulting-type approach to analyzing the tax code.
• It’s amazing how many tax credits, exemptions, (read: subsidies) there are for everything from agriculture, energy, military, sports, healthcare, transportation, housing. In the end, there is “something in it for everyone.”

Are we taxing the right things?

Why doesn’t the US use the VAT tax? It taxes consumption (yes, Americans spend too much of the money they don’t have), and it’s easy to collect. For good or bad, taxes are used as an instrument of economic policy (clearly not a libertarian approach), and yet Reid notes “Economists, for the most part, or considerably less confident the politicians about the economic affects of raising or lowering taxes.”

What is considered fair?

This is a topic that seriously starts to veer into values, politics, and people’s preference for the role of government in society. So, I will just end with some quotes from Reid’s book, which I find entirely thought-provoking.

[Lack of economic mobility in the US] “If you’re born the top 20%, you have two in three chance of staying at the top. If you’re born the bottom 20% you have a less than one and 20 shot of making it to the top.”

“The major reason for growing inequality is that the rich people today make most money not from wages but from capital investment, stocks, bonds, real estate, etc.”

Quote from Lloyd  Blankfrein, CEO Goldman Sachs, whose net worth is 40 and 50 million, which puts him in the top 1/10 of 1%. ‘If you grow the pie, but too few people enjoy the benefits of it, the fruit, then you’ll have an unstable society.’

“Supreme court justice Oliver Wendell Holmes Junior said taxes are what we pay for civil a society. The alternative, is also a quite scary one, the government can just use the police and army to take over goods and services. Think about China, Venezuela, Russia occasionally deciding to nationalize oil fields, or gold mines. Governments also have a very convenient monopoly on printing money. Governments can also bring in money by borrowing. Also governments can also sell goods and services to bring cash, such as selling oil on their lands.”

Everyone has an opinion on taxes (too high) or what it should be spent on. What’s your take on it (and as I always emphasize with students), can you back up your argument with logic and data?