My Annual Rant on Taxes

Every year around tax time I get very annoyed with how the tax code is structured, and every year I post the same rant. If the government is going to continue doing the same dumb things every year, I don't see why I shouldn't continue making the same criticism every year. By the way, this is not around April 15 because I got an extension until October 15, and I just took care of that dirty job last week.

It's not that I don't believe in taxes, I know we have a government which should do some things (way less than what they currently do, but that's a different rant), and that it needs to collect money from people in order to do the things it should do. What annoys me is the wasted time, money, and effort that happens every year because of the way money is collected.

First of all, tax deductions. If everybody just had to pay the same amount or the same percentage with no deductions for anybody on anything, we would all just pay and be done with it. But since tax deductions exist, in order to take advantage of them one needs to become a part time accountant, keeping track of every little expense and car trip. And what for? How does it benefit individuals, the government, or the economy in general to have everybody waste their time keeping track of miles and expenses? But given that the deductions exist we end up wasting our time trying to protect our money from being over taxed.

Second, the complexity. If we had to pay the same amount or the same percentage, the tax forms would be very simple. We wouldn't have to hire tax preparers or accountants just to figure out how much of the money we make we get to keep, and how much tribute congress demands in exchange for the privilege of staying out of the royal dungeons. Our taxes are so complex that there isn't one person in the world who knows all of the tax rules, regulations, and loopholes. It's easier to understand all of general relativity, quantum mechanics, and super string theory than it is to understand the tax code. And why do we need that? Nobody benefits from all of us trying to understand such a monstruosity.

Third, the waste. Because of the complexity of our monster tax system, we have a whole industry dedicated to preparing taxes. There are millions of people who all they do all year long is prepare taxes! What is the economic value added of that? When people make cars, grow plants, write software, make movies, paint portraits, discover laws of nature, etc. they create value, because they bring something new to the economy that wasn't there to begin with, and we all are richer because of that. But when millions of people spend their time deciphering a byzantine code that countless other millions of people spend their time writing, nothing is being produced. That is pure wasted effort! It is like having millions of people making holes on the street, and another set of millions of people covering those holes. If the tax system was simple, we would have no need for the majority of IRS agents, tax auditors, tax lawyers, and accountants. They could move on, and spend their time doing productive work instead of wasting their lives and their talents on something that creates nothing.

Finally, progressive taxes on income. Why should we be taxed on the creation of value? And why should those who create the most value be taxed the most? Whenever you tax something you create a disincentive for that particular something. In Denmark people have a steep car tax, so people tend to have less cars. If you tax productivity, then people will tend to be less productive. When the CEO of a fortune 500 company is deciding whether to spend the 50th hour of the week working vs. relaxing, his effective pay for that 50th hour will influence that decision. If he is heavily taxed he will probably decide to relax instead of work. That choice to relax one extra hour of every week might make the difference between company success and company failure, which would make the difference between economic growth in the region where that company operates and stagnation, and would have a direct impact in the lives of all the employees, customers, suppliers, and vendors to that company. A much better way to get tax revenue would be to tax the destruction of value. So don't tax us when we make the money, tax us when we spend it. That way our incentives to produce and make the economy richer continue at full force, and we just have to pay more for the things we consume. Another benefit of that approach is that we don't have to keep track of taxes, because those selling us things would do that for us.


So what can we do? There is a proposal out there that would have most of the features I want, the fair tax proposal. They want to eliminate income tax, capital gains tax, dividend tax, etc. and make all tax revenue come from a national sales tax. The only potential downside I see to this proposal is if the government decides to implement the national sales tax without getting rid of the income tax. If we can't get the fair tax, at least a flat tax would be much better than what we have now.