Three Hours I’ll Never Get Back

It’s that time of year again, one that most Americans hold near and dear to their hearts: tax season. By most Americans I mean “nobody I know”, and by “near and dear to their hearts” I mean “please kill me now”. I’m old enough to remember having to do my taxes by hand on paper (and I was educated in the Bonsall School of Finance, where the only rule is “don’t get caught”), so I have to admit that the idea of online filing and doing things on computers still makes me smile. It’s more like the smile you get when the morphine finally kicks in, however; it’s not that the pain is gone, just that something is covering up most of it.

Why does it have to be this way? Believe it or not, I am not like the stereotypical libertarian in that I acknowledge that I’m going to have to pay at least some taxes; after all, I value some of the services I receive from the government, and I don’t get to pick and choose (although whether I should is a different argument). But I know plenty of people who are gung-ho about government 364 days out of the year, and come April 15 they will scheme just as hard as I do to weasel out of paying a cent more than they must. Sure, some of it is good old-fashioned greed, which I can both respect and admire, but there’s more to it than that. On some level, I have to believe a certain amount of it is just animosity against a ridiculously complex tax code.

I’m not about to turn this into an argument for a flat tax, because that’s as much a moral argument as it is a political or economic one (and frankly there’s no such thing as a serious economic argument when it comes to taxation, at least as long as we keep spending more than we’re taking in, even in the good years). But I am going to take the opportunity to rail against the sheer ludicrous amount of social engineering packed into the tax code, particularly considering how much of it is either (a) ineffective or (b) inefficiently done.

Consider: every deduction, every credit, every line item manipulation away from baseline percentage of income is an attempt by the government (read: politicians) to incentivize people towards or away from a specific kind of behavior. This has nothing to do with the amount of services you consume (otherwise why would we offer a tax deduction for having children?) and, while I am by no means an economist, I am not aware of a school of thought that shows how such a Byzantine approach would stimulate the economy (a free market approach would cut taxes across the board; a Keynesian approach would be to have the government spend the money; the time spent finding the deductions is a deadweight loss either way).

I’ll give a couple examples. First the ineffectiveness, for which I’ll use the home mortgage deduction, the third-rail of tax policy. Everybody loves this one, because it makes home ownership easier for everyone, right? I mean, as long as you file taxes, you get to write off your home mortgage interest, so that makes the house cheaper in the long run. Everybody wins! Except it doesn’t really work that way, because everybody knows about it. And by “everybody”, I mean the people selling the homes and in particular the real estate agents. You really think they don’t jack up the price of the houses knowing you can right off the interest? When’s the last time you went looking to buy a house or for a home mortgage loan and they didn’t make sure to mention that, even in passing? The write-off gets absorbed into the price paid, and what you are left with is… well, you’re no better off, and if they ever do get around to repealing it, you’re stuck holding the bag, which is why nobody even dares to suggest it. Which is why it’s ineffective; nobody is more likely to be able to afford a house, because the market has just responded to the change and absorbed the benefits before the fact.

As for inefficiency, let’s look at something like the way teachers who buy materials for the classroom can right off a certain amount. It’s a small amount ($250), and you need to keep receipts, just in case. This is one of many small deductions meant to encourage what is considered “good” actions in society, and one that I’m actually not going to argue against (because seriously, how can you?). But we expect teachers to be aware of it, to claim it, and to make sure they know exactly how much they spent, just in case, because heaven forbid they get a whole $250.

As an alternative, since the government knows your occupation, why not just give them the $250? I see three possible outcomes here. Worst case scenario, they don’t buy any classroom supplies all year and they get a small bonus for being a teacher. Oh no, we just incentivized people to be teachers. Damn shame that. The second possibility is they buy classroom supplies up to but not beyond $250. They might pocket a small amount (see above), but the real benefit here is they don’t have to keep receipts and they don’t have to make that marginal choice about whether it’s worth it to pick up the supplies for the kids. Possibility number three is they spend more than $250, in which case either they itemize, keep receipts, and go the full troublesome route (if they spent enough), or they just decide “the heck with it” (which they may be doing already) and eat the loss on the extra. If they are doing that anyway, at least this way they don’t have to lose as much money and they get a sense that the rest of us are behind them.

The worst part of all of this is that this sort of Byzantine tax code is more regressive than any other, more visible taxation. Not only do the benefits more easily accrue to the well-heeled (do you know a lot of poor people who can afford to donate 10% of their income to charity?), but even those benefits that can be claimed by the lower income brackets are hard to ferret out. You either need to have the time to spare and the education to find them (unlikely), or the money to afford someone who can do it for you (even more unlikely). The benefits end up in the hands of the wealthy and the tax preparers.

While I oppose using the tax code in any way for social engineering (mostly because I oppose social engineering), if it’s going to be done, let’s at least do it well. There are easily dozens of examples that can be found through a cursory search where the government has more of the required information than we do, from electric car ownership to wetland ownership. Either simplify the tax code by getting rid of all of it and let the people decide what they truly value, or put the burden back where it belongs, and let the people have their time back.