Tax Day

15 April is tax day in the US for individuals, but if you run a business, 15 March is the day for filing business tax returns.  This year, it’s a Saturday, which means that the returns are actually due on Monday, but yesterday was the day I gave over to getting them done and out the door.

Ever since I was a little kid, I had heard that income tax was this terrible, painful ordeal.  But when I was old enough to work and file tax returns, it didn’t seem terribly difficult.  Since the late 1980s, I’ve used tax software: it keeps track of the mechanics of the tax forms, and makes the math foolproof.  But I still have to do the donkey work of collecting and compiling the figures to type in the boxes, and if I had to do it the hard way, with pencil and paper, I could.

When I went into business for myself, I found that business tax software is not as polished as personal tax software.  No matter, it’s still the same basic process: income less deductions gives taxable income, apply the tax rate or table, subtract what you’ve paid already, as well as any tax credits, and pay what’s left over, or get a refund if you’ve paid too much.

When I was in school, in all my math classes, business math was never discussed.  From elementary school to college, there was arithmetic, fractions, decimals, algebra, trigonometry, calculus, differential equations.  But there was nothing about balancing a checkbook, keeping books, compound interest, or tax returns.  Some of my older math books had sections on these subjects, but the teacher didn’t get to them.  I’m sure it’s gotten worse since then with general educational rot.

But I don’t believe that’s the reason people think taxes are terribly difficult.

Despite the simplicity of the basic process, the US and state tax codes are inordinately complicated.  The government is always taxing this and giving credits for that in order to push the economy in one direction or the other.

And if you knew the magic formula, you could make your taxes disappear.  Or so people imagine.

I thought so too, at one time.  So I studied the books and the instructions from the government, and I concluded that there was no magic formula.  If you buy a house with a mortgage, you can deduct the interest.  You can also deduct some of your state and local taxes, charitable contributions, and a few other things.

And if you’re diligent, you can reduce your taxes that way.  But make them disappear?  No way.

But people imagine that there is a magic bullet, and are disappointed that neither they nor their tax professionals can find it.  And then they hear about someone who invested in oil wells or pincushions as a tax shelter, and feel cheated.

But let’s imagine that all of that was swept away.  From time to time, politicians have called for vastly simplifying the US tax code, with a tax return that would ‘fit on a postcard.’  Let’s imagine that it came to pass, and that, in fact for most taxpayers, the government could send the tax return to you, already filled in with data that the IRS is already acquiring under current law.  You could simply sign the return if the figures are correct, but you’d still have to fill in a much-simplified return if something was in error or you ran a business.  Let’s say, further, that this new income tax resulted in the same revenue for the government as the old tax.

It’s a charming thought, but it would be an economic disaster.  Half the IRS—or more—would no longer be necessary, and could be laid off.  Whole industries have been built around the complexities of the tax code, from H&R Block and Jackson Hewitt to the vendors of oil well and pincushion investment schemes.  They’d all be out of business, or reduced to shadows of their former selves.

And we’d lose one of the legends of American culture: the magic formula to make one’s income taxes disappear.  But then again, for more than half of our history, we didn’t have an income tax, so we can probably survive that part.

2 thoughts on “Tax Day”

  1. People overestimate the value of tax deductions. It doesn’t make a lot of sense to incur an expense where you get back 30 cents on the dollar or so if you can avoid that expense. Only medical expenses in excess of 10% of your adjusted gross income are deductible on Schedule A. “Because it’s deducible” isn’t a good reason to buy or do something. The savings are not that large.

    Colorado has an interesting wrinkle in their tax code. If you deduct state income tax on your federal return, you have to add it back to your taxable federal income, which is the basis for determining your taxable income for Colorado. I was a few hundred dollars past the point where it was worthwhile to itemize my deductions, and it would have saved me about $100 on my federal return. However, I would have had to pay an additional $180 in Colorado state tax, so I chose not to itemize.

    I am in favor of an expanded standard deduction and elimination of certain deductions, like deduction of charitable donations and mortgage interest and tax credits for day care, which aren’t very large. I don’t know how much of the GDP can be attributed to H&R Block, Jackson Hewitt, Liberty Tax Service, and CPAs everywhere. Paid preparers are being replaced by software like TurboTax. The main attraction of a paid preparer is for people who are getting the earned income tax credit, and who need the refund anticipation loan.

    Tax preparers charge “by the form”, so they have an incentive to produce more complicated returns. I’ve had to show more than a few people that they would be worse off to itemize, because they didn’t have enough deductions to exceed the standard deduction.

  2. New York isn’t terribly different. One’s state income tax is a Federal income tax deduction, but not a state tax deduction. The mechanics are different on the NY tax forms, but the result is the same.

    You’ve touched on another point–the mortgage interest deduction. Canada is very similar to the US culturally, but their tax laws do not admit a mortgage interest deduction. In 2008, while we were running around like chickens with our heads cut off over the ‘mortgage crisis’ (or whatever you care to call it) not much happened in Canada.

    The effect of this deduction is to enable people to afford bigger mortgages than they could if the interest weren’t deductible, providing yet more hot air for the bubble. But, like so many other things, there are entrenched interests in favor of the status quo: it’s almost as much a third rail of American politics as Social Security.

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