Death and Taxes

I just finished reading perhaps the scariest book I have ever read. It is by David Cay Johnston and it is titled Perfectly Legal.

While I do not quite go for all of his alarmist rhetoric he none the less exposes some very sordid facts about the current Tax system in the US. However I somewhat disagree with his conclusions that rampant corporate Tax cheating is soley a function of decaying moral fibre on the part of American Businesses. I think he should entertain the possible notion that the US tax system simply is out of whack with reality. I forget the current figure but the US tax code printed out on standard 8.5 by 11 paper stacks up several feet and it would be difficult for a single person to read through the whole thing in their spare time much less understand it. Oh yeah, it also has significant changes on an almost yearly basis. In such an intermixed conflicting and tangled code it has reached the point where seemingly innocuous changes have HUGE consequences in both intentional and un-intentional ways. The book is pretty much a jaunt through the worst cases that have come to light.

overwhelming convoluted systems bewilder the poor and house any number of chicanery techniques for use by the less than scrupulous. Further more, even for those not of a shady bent it simply is smart for them to consider different means of figuring out their tax burden because as Johnston points out many of the systems in use are 'Perfectly Legal'. He uses his title to good effect and points out some extreme cases but the fact remains most of the worst offenders were within the law. Thus eroding morale fibre simply does not enter into the equation in my book. A Shitty Law makes for Shitty compliance or GIGO. In his conclusion he points out some of the Major Tax reform options and briefly tears them apart on the basis of unintended consequences as well before moving into a doom and gloom conclusion. Thus he commits a cardinal sin in my book of pointing out the emperor has no clothes but doesn't offer much with which to cover him properly.

I do agree with one thing. The current system simply cannot stand. The bracket creep of the alternative minimum tax, or so called stealth tax, alone is justification for pretty much an entire code overhaul. The gradual growth of the code into an unintelligible mass of intertwined unclear and outright bought exceptions has gone beyond the pale and to me is more to blame for the bail out of corporate America than anything else. Most people when asked do not think tax (as a concept for funding government) is unfair. Most Businesses when asked also to not think it is unfair. Thus if current system is largely derided as unfair while people think taxes are fair I find it a reasonable assumption that there is a fair system out there waiting to be adopted. One of Johnston's hobby horses seems to be the decline of the Audit and the ensuing rise in avoidance, especially by the rich. I for one do not think upping the power of the IRS is the answer. At least not in terms of going back to the old systems of the common Audit. The process is invasive, often demeaning and once upon a time was a cause of public ridicule. Johnston points to the fact this is no longer the case but seems to pass over the possibility that if Tax Audits once again became more common for all brackets then they may once again regain their stigma. Instead Johnston points out that middle American has the least chance to cheat (and hence the lowest incidence of cheating) because they have little chance to hide income from the powers that be. Instead of ramping up audits and turning the IRS back into a rabid slathering hound of government tax enforcement why not model the reporting systems for ALL income levels more along the lines of that faced by Middle America.

Thus the answer is in a simplified code and in technology. It is high time the IRS stopped working with paper returns. Filing should be electronic by all. One of the common means of escaping detection is in the simple fact the IRS does not capture all data from its returns. Only selected lines of paper returns are entered into computers which generate reports suggesting audits if the people entering did not flag them as 'funnies'. The IRS machines are outdated by any sense of the concept and absolutely absurd in the day of the sub 1000 desktop that can out compute probably the entire IRS tax system with half its RAM tied behind its back. This means up front that filing would be instantaneously inspected and errors brought to the filers attention and indication that if a filer wishes to peruse their filing it is highly likely it will be subjected to an Audit. IE it thinks the return is faulty or suspicious. This would relive the IRS of the mundane and funds draining process of actually hand entering returns. It also would assure at least that all values would be 100% inspected by computer algorithms for common errors and tax evasion schemes. Do the computer checking up front and eliminate easy errors before the return is even filed as checked against the tax agencies systems rather than proxies like turbo Tax and HR Block. Just like paper forms are free make easy internet filing free as well as automatic deposit into accounts. Finally, put in place a withholding system smart enough to not tax until income levels reach taxable levels. Such a system needs to account for multiple revenue streams for an individual such as multiple jobs and or investments.


As for a simplified code. I have to admit that is one hell of a tricky proposition. I have a few suggestion... some of which are not limited to tax reform.

For one I think the Minimum wage should be tied to the base cost of living adjusted yearly for inflation. This eliminates the possibility of someone hitting the EITC nightmare or the need for this program entirely. While there are good arguments for it I think the reality that someone can actually work full time and qualify for it to be atrocious. Some might argue such a hike in minimum wage to be disastrous to the number of jobs offered but I simply don't buy it. This is merit based income distribution of the first order and makes sure that the basic level of pay is a livable wage. Increases to the unemployed numbers due to this raise are not increases in those numbers. They are the true current numbers unmasked. Someone who works a full time job and is not above the poverty line in the most powerful economy in the world should be an unacceptable state of affairs.

CEO and executive re-re-embursment must be tied to compensation for the rank and file employee. That means the CEO can't make more than X amount over what the rank and file makes.

Stock. Paper ownership rights and employee rights need to find harmony. For starters Dividends should be shared equitably with Employees. After all it is by their work that the dividends exist in the first place. In examples of 401k plans requiring stock ownership the rank and file need to enjoy the same privilidge for exercising those options as the executives and share holders of the company.


The stack of papers that makes up the current tax code needs to be burned. What replaces it needs to be short, sweet and consistent. No more business and individual world. No more breaks, exceptions, and incentives. Help people not working. Don't hurt people living paycheck to paycheck out of necessity and demand that the rest pay their fair share as determined by a progressive tax rate. IF businesses pay out to avoid profits the people paid get taxed. If they invest in anything other than their own company it first goes through profits taxation. If it is invested in the form of retirement/compensation packages it must be evenly distributed by compensation among all employees. If you want all the spoils of your business to yourself then don't hire anyone because obviously you can do it all yourself if you get all the rewards.

Realestate valuation and building deprecation needs to be changed to reflect reality. If buildings appreciate in value then they should not be allowed to depreciate for tax reasons simply because that is the way it has been done. When the process no longer matches reality you create a situation rife for manipulation cause you have already shown that the process is arbitrary.

Social security is fucked up. The rate was hiked to fund the coming baby boomer bulge and then the money collected was spent with only IOU's from government agencies with no money in accounts to pay it back. This means taxes will almost certainly be raised in order to cover the IOU's. It is either that or an increasing amount of the budget will go to debt payback meaning a scaling back of services provided. Either way the cost is going to be high. To start with the cap should be removed. Second, I think we should take a hard look at actually making social security a progressive tax which increases with income. Lastly, I have to say the time is long since passed when money collected to pay SS benefits needs to be earmarked ONLY for activities which will pay SS benefits.

The Bush private accounts plan is simply 401k plans writ large for the US. I would rather see the abolishment of SS altogether than see the Bush personal accounts enacted. There are no guarantees with stockmarket invested money and retiring during a particularly nasty down swing in the market could prove disastrous through no fault of the people ruined. Trying to retire on an investment process you are not fully in control of and which is not insulated as much as possible from market swing is insane. If we want to have a social program for ensuring we never return to the days of indigent elderly again then we need a solid and SECURE system heavily insulated from the fickle nature of the stock market. SS was instituted to avoid the possibility of indigent old age and to insulate people from the effects of another Stock Market crash like the one which led to the Depression. Thus making a move to tie the fortunes of SS to the stock market is a complete about face from the purpose of its founding and one which I think we should be extremely leary of.