Wednesday, April 13, 2011

The Tax Man

Minority Report, a really good Spielberg film, has been quoted many times in BRT as its view of the future, particularly regarding haptics and interface, is nuanced and well researched but... as par for the course of BRT, the film is not the raison d'ete of this piece but rather acts as start point in looking at the IRS and the incredible waste of time and money we put out in order to do our taxes. The guesstimate to date: a cool $250-300 billion, a rather tidy sum spent on a system that encourages everyone to cheat while providing something of little or no value unless one has a sharp accountant able to bury one's monies with skill and finesse.

"This very elaborate and morally ambiguous law enforcement system is predicated on the government determining what your actions and intentions will be, often before you do. It’s not all science fiction.

A number of politicians and bureaucrats in Washington D.C. are seeking to step up the Internal Revenue Service’s powers, and technology, to essentially audit taxpayers before returns are even filed.

In remarks to the National Press Club last week, an IRS spokesman unveiled the agency’s vision for the “look forward” model in which most of the pertinent reporting information for the average taxpayer (W2, 1099, mortgage interest etc.) would be submitted to the IRS well in advance of the individual deadline."

Sovereign Man goes on, giving the benefit of the doubt to the IRS regarding precognition, a notion I am not sure of, but his analysis of how to do taxes right is spot on.

1) Keep it short. The Baltic countries are a great example of this– the entire Estonian tax code is about 70 pages, roughly 1/1000th the size of the US tax code (which is still prone to so much interpretation). It takes about 15 minutes to fill out an Estonian return, and you can do it online. In the Maldives, it’s even easier.

2) Keep it simple. When you have a tax code that’s so complex it has given rise to a multi-billion dollar preparation industry, you have a problem. There are dozens of different forms at the IRS, and over 20 versions for the 1099 alone! This is a system that is prone to massive flaws and a great deal of contradiction.

Hong Kong is a great example of a simple system. Taxes are levied at a flat rate of 15% based on the “territorial principal” that only income derived from Hong Kong is taxed. There is no capital gains tax, no VAT, no estate tax, etc. And yet, the biggest problem the Hong Kong government faces regarding taxes is how to give away their massive surplus.

3) Keep it low. When you make it easy and painless for people to pay taxes, it removes most of the incentives for them to cheat. In Singapore, tax rates are among the lowest in the world with a maximum rate of 20%. The capital gains rate is zero. The corporate rate varies from 0% to 17% (and keeps falling).

Under these circumstances, why cheat? By keeping rates low, the government is removing any incentive to engage in complicated (and costly) tax avoidance techniques."

If this was done, the army of accountants and tax lawyers needed to do taxes would shrink to insignificance and the cost and agita of sending money to Uncle Sam would go away but the special interests are too powerful to let this happen and besides, we all know who owns the IRS, don't we?

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