Reflections on the Income Tax

I’ve been spending quite a bit of time with TurboTax lately, looking for last-minute opportunities to manipulate my income – legally, of course – to minimize my income tax.  Why not just hire a professional to do it, you might ask?  I’ll tell you later.

First, let’s remind ourselves what a vile institution the income tax is.  Taxation in general is bad enough – legalized theft, really.  The income tax is particularly onerous because it requires us to drop our pants financially, because it’s hideously complicated and because it generates huge amounts of deadweight loss.

With all the concern about privacy these days we hear precious little about the intrusiveness of the income tax.  We must reveal intimate details of our economic activities.  Of course the IRS holds all that information in confidence – until they don’t.

The tax code, in case you didn’t know it, has become complex far beyond the comprehension of any single tax expert.  Consider, as a random example and a mild one at that, the instructions for line 31 of Form 6251, Alternative Minimum Tax for Individuals:

  • ImageIf you are filing Form 2555 or 2555-EZ, see instructions for amount to enter.
  • If you reported capital gain distributions directly on Form 1040, line 13; you reported qualified dividends on Form 1040, line 9b; or you had a gain on both lines 15 and 16 of Schedule D (Form 1040) (as refigured for the AMT, if necessary), Complete Part III on the back and enter the amount from line 54 here.
  • All others: If line 30 is $175,000 or less ($87,500 or less if married filing separately), multiply line 30 by 26% (.26).  Otherwise multiply line 30 by 28% (.28) and subtract $3,500 ($1,750 if married filing separately) from the result.

Can anyone set this to music?

The original form 1040, issued in 1913, ran to three pages in length with a single page of instructions.  The current federal income tax is set forth in Title 26 of the U.S. Code of Federal Regulations.  You can get your own copy, all twenty volumes running over 13,000 pages, from the Government Printing Office for just $974, free shipping included!

The complexity of today’s income tax leads to hundreds of billions of dollars worth of deadweight losses each year.  A deadweight loss, you will recall, is a loss that is no one’s gain.  Deadweight loss associated with income taxes consists of two parts: (1) tax preparation costs plus costs of finding and implementing avoidance or evasion strategies and (2) lost gains from production and trade because of the disincentives of taxation.  If you’re tempted to say that money spent on accountants isn’t deadweight loss because it generates income for accountants, you haven’t internalized Bastiat’s “Fallacy of the Broken Window.”  If you’re going to count income to accountants you have to subtract the value of their efforts which could be spent doing other things.

TurboTax is good news and bad news.  The good news is that it reduces tax preparation costs while generating profits for Intuit.  The bad news is that lower costs mean taxpayers are less inclined to rebel against the tax code.

What disturbs me most about the income tax is not its complexity but how resigned most people are to this heinous institution.  We forget that taxes are extracted using threats of physical violence.  People are so brainwashed!  Every time I open up TurboTax I face the picture shown here of happy taxpayers.  Or maybe they’re happy accountants.  Or happy IRS agents.  Anyway, I’ve managed to avoid barfing on my keyboard thus far.

So why do my own taxes?  Stubbornness, I guess.  First of all, I’m an engineer and a numbers guy.  I can figure this stuff out (I think).  With TurboTax I can play what mathematicians call finite-difference games to see how hypothetical increments of various kinds of income alter my tax liability.  Second, I hate to shell out a four-figure fee to an accountant who may add little or no value to what I can do on my own.  But mainly I guess it’s just the perverse satisfaction in doing first-hand combat with The Man.

If you’re like me and have some choices about income such as IRA withdrawals or realization of capital gains, better get cracking ‘cause you only have about three weeks left.

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5 thoughts on “Reflections on the Income Tax

  1. I don’t think that people are brainwashed. At least part of them can think correctly and according to the current situation. We have quite high taxes in Russia and know where every single russian ruble (RUR) went. Although we can’t track further ways. That’s why some of money become stolen…

Please keep it civil (unless it relates to Jacques)

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