Tuesday, March 24, 2015

Income Tax is Immoral and Unconstitutional – and Not (Just) for the Reason You Think

Income Tax is Immoral and Unconstitutional – and Not (Just) for the Reason You Think

I have just paid my biggest bill of the year. The invoice was for a cool 9% of my entire annual income – or my “Adjusted Gross Income” (AGI) as it appears on my tax returns, which have just been filed. And that invoice was from my accountant who just filed them for me.

I have a pretty modest income – so modest, in fact, that my AGI is of the order of a half of the median household income across the United States – the kind of income that triggers significant subsidies under the Affordable Care Act. Even the “top line” of my income falls short of that median: so it’s not as if I’m earning loads and deducting huge amounts.

My financial life last year was pretty simple: my earnings derived from a modest real estate portfolio and some freelance/consulting work. My income is earned through my small business, which, for those who know about these things, is an S-corporation. I have no employees. I do no payroll.

Yet, I have just paid my accountant more than a month’s worth of income to complete my tax returns.

How many pages of tax returns do you think that I, a single individual, and my S-corporation (a small business) had to file, bearing in mind the small amount of income in question?

Frankly, there’s no good reason the answer is not one or two. But you already know the answer is more than that, don’t you?

Ten? Try again.

Twenty? Keep going.

Surely not 50?

You’re still not close.

Did I hear you say 100 – you’re going for three digits now? Wow.

Still not there.

The answer, my fellow American tax victims, is 149.

Just take a moment to absorb that. A sub median-earning American taxpayer, engaged in simple business activities, has a 149 page tax return. And if he doesn’t get it right, his error is punishable. Of that 149, about 100 go to the Feds.

Completing 149 pages of tax forms/schedules/supporting statements is a lot of work. And I know exactly how much it is, because of that big invoice from the accountant that I already mentioned.

It’s $2000 of work – my aforementioned largest bill of the year. And it’s $2000 of work I in no way could have done myself.

I’m no high school drop-out. I have a first class degree in physics from one of the best universities in the world. I like numbers. I like logic. I like intellectual rigor. I even have a nerdy love of spreadsheets (which tells me, for example, exactly how much I spent on groceries this month five years ago ($173.41, as it happens. I’m low-maintenance)).

But I could not reverse engineer those 149 pages of tax returns if my life depended on it. And I would defy anyone without a CPA qualification to be able to do so.

I have no complaint about my accountant, who provided very good service this year, but even he couldn’t get it right first time. As I type this article, I am awaiting “corrected” state returns (which are no shorter).

Moreover, as any small businessman knows, my accountant can only generate those 149 pages of returns after I have compiled all the necessary numbers and data in neat spreadsheets, nicely itemized and comprehensively annotated (two or three days’ work, right there, perhaps?). I know for sure that most tax payers are not as proficient with Excel as I am – so my accountants have an easy time of it with me. (He even told me so.)

Here’s the reality of the American tax system for modestly earning individuals who run small businesses:

My government has put me in a position where I must either pay 9% of my income to a professional just to enable me to avoid punishment, asset garnishment and even imprisonment. Supposedly, I can “do my own taxes”, but that is a joke. No one who has not gone to school for it could accurately complete those 149 pages with any honest degree of confidence – and I don’t care what software he’s using. Moreover, even if it were do-able, the time taken to learn how to do it and then do it properly would be measured in weeks, not hours. And we don’t get to invoice the IRS for our time.

Look in wonder, America, at the most regressive aspect of any taxation system in the world – its utter complexity to the point of Kafkaesque absurdity. And if you think it must be like that, literally a few days ago, the British chancellor announced the abolition of the annual tax return in the United Kingdom.

Can anyone, conservative or progressive, justify the need for self-employed individual to spend 9 percent of his income just to remain a free citizen in good standing or, should he not have the money to spare, to go to school to navigate his way through whichever of the 74,000 pages of the tax code apply to him?