Thursday, March 31, 2011

Doing Your Taxes

Jay Nordlinger writes today about taxes in America:

You know how people say, “There’s something wrong with our tax system if people can’t do their taxes on their own”? I think I agree with that. A special caste, almost a priestly caste, has grown up: tax accountants, tax preparers. They exist to help us do our taxes, or to do them for us.

Reminds me of a conversation I had a couple of weeks ago with a friend from Denmark. He was extolling the virtues of the Danish system: you give the government all your information, and they compute your taxes for you and send you a bill. Simple. I understand the allure of this idea, especially around this time of year. This year I get to file a federal return and two state returns, with major penalties on at least two of them because of some unexpected income in the year. It's a pain, and thank goodness we have software to help us.

I'd still prefer not to give the government my information if I don't have to. It's a losing battle, of course, or maybe a lost one: most of my finances are reported to them anyway in the normal course of doing business. But at least there's a chance to reverse this. Once the government is doing your taxes for you, the odds of reversal drop to infinitesimal levels.

But an even more important point is that with the authorities doing my taxes for me, I'm not as involved in the tax system. Right now I can see the loopholes: railroad workers get special treatment, as do the blind, the aged, those affected by natural disasters, and so on. It's right there on your 1040. Some loopholes are harder to find, of course, which is why we still have tax accountants. But if we turned over all preparation to the government, I lose whatever insight I currently have.

My Danish friend thought I was being a typically paranoid American. I hope my response was typical.


  1. Reminds me of my view on tax structure:

    'Loopholes' will be with us forever. What they really are is a method by which government exerts its muscle to create monetary incentives for certain behavior. This represents power, and even if the tax code were wiped clean, we would be right back where we started in 20 years, just with different 'loopholes'. Things that are popular are called deductions, things that are unpopular or benefit a small number of people or companies are called loopholes. Do people who want to wipe the slate clean really want all their tax-advantaged retirement accounts to instantly become taxable? I think not.

    The other side of the coin which you point to, is that as complexity increases, the number of people aware of those incentives decreases, because people are less willing to wade through the muck. This leads to lower than expected use of tax incentives for lower income or lower educated people. Even those in the middle or upper middle class who might even pay someone to do it for them end up taking advantage of government incentives less because they seldom become aware of the incentives.

    Personally, I find doing my own taxes works out best because I know what the incentives are, and I can make my own decisions on which ones I will let change my behavior. I don't envy you for doing two different state forms in one year though. My solution? Move to Texas :)

  2. Thanks for your comment, Eric. Yes, I agree that loopholes aren't going away, but I still want to be aware of them. And I think there could be fewer of them. I do think there is a difference between loopholes that anyone can take advantage of, and those that affect a privileged few.

    One of my "favorites" (meaning least favorites) is the oxymoron Personal Corporation. By incorporating yourself, you can avoid Medicare taxes, which is a pretty nice deal for high earners. And guess who benefits the most from this loophole? Huge surprise: accountants and lawyers!

    If it were truly up to me we'd seriously redraft our income tax code. But I'd be happy just to see it simplified. I'm fine with resimplifying every 20 years, if that's what it takes. I heard somewhere that the tax code is around 60,000 pages. Couldn't we get that down to, say, 10,000 without doing serious harm to the nation's finances? Maybe even 5,000?

  3. How about 20 pages? At least for individuals, not businesses. That way an ordinary citizen can actually have a chance at knowing and understanding it.

    I'm not sure how my taxes are going to work out....I moved from NJ to Delaware, and work in Maryland. Having our taxes done at H&R Block

    And as for your Danish friend, I think Europeans are too used to living in their comfortable cages, and letting their government tell them what to do and what to think.