4 ms·

Tax laws need to be much, much simpler. The more complicated they are, the easier it will be for people to sneak by without paying and for loopholes to exist.

Tax laws need to be much, much simpler. The more complicated they are, the easier it will be for people to sneak by without paying and for loopholes to exist. It's the same thing that happens when a program drifts away from triviality - the probability of bugs increases greatly. Make tax laws trivial, and most of these problems - and most of the need for the IRS - would go away.

tzs 15y ago
Tax laws generally start out simple, then get complex patching holes. My favorite example. Once upon a time a long time ago, a company wanted to pay a dividend to shareholders. That would be taxed as ordinary income to the shareholders. The company's accountants had a brilliant idea. 1. Do a stock split. Say, 105 for 100. 2. Do a stock buyback, where the company buys back 1/21 of the outstanding shares. Net result to shareholders: every 100 shares becomes 105, then the company buys back 5 out of every 105, leaving the shareholder with 100 and some cash. Since the cash came from the sale of stock, it's capital gains. The tax code was fixed so this would not work, by inserting a new section that gives conditions that a stock buyback must meet to be considered a stock buyback. If it fails to meet the conditions, it is considered to be equivalent to a dividend distribution and taxed as such. The conditions have to take into account a bunch of factors, so as to not penalize legitimate buybacks but not leave holes that allow abuse. I believe that a large part of the complexity of the tax code comes from this kind of thing.
- wisty 15y ago
  Why should income and capital gains be taxed differently anyway? If it's to stop Grandma getting hit with a huge marginal tax when she sells her house (despite it being a once-off kind of thing), just introduce some kind of smoothing. If your income is uneven, the tax man can give concessions (if you get a lot of money after a period of low income), and rebates (if you have a low income period after making a lot of money). Easy, right? No more need for tricky rules about how to move money between the different categories.
  - roel_v 15y ago
    Because of incentives, because the actions that created the capitals gains in the first place were already taxed, to be able to correct for the self-employed who incorporate vs those who don't (situation of getting dividend on 5 stocks Coca Cola is very different from being a sole proprietor and paying yourself effectively through dividend), to keep the administration sane (how can you smooth a windfall like selling a house? You'd have to do it over 10 years or so, how are you going to keep track of that? What if the person moves, across the country or abroad? etc...) None of it is as simple as it looks - there is a reason we ended up in the situation we are now. Nobody likes it, the IRS itself the least. It's not a matter of saying 'oh let's just start from scratch'. (See also: 'second system syndrome', which applies to law just as much as to software)
  - dantheman 15y ago
    Because income and capital gains are two different things. Capital gains should be lower because there is a risk that you may lose money, if you add a high tax on top of that lots of investments become not worth it.
    - yaix 15y ago
      If you start a company and then pay yourself part of the earnings, there is a risk too that the company goes bankrupt. If you specialize in an industry and get a paid job, there is a risk too that you dont find a job or get laid off. I dont see how the risk of capital investments is any different to other kinds of investment that would justfy it to be taxed differently. A better explanation would be the higher capitalization of the groups lobbying for a lower tax for that income group.
    - sqrt17 15y ago
      The problem with this way of thinking is that, this is not necessarily true: Regular ways of getting income also make you take part in the risk of whatever or whoever you get your income from, and as a result, more and more things that would be income get wrapped into capital gains. The fair thing to do would be something where losing money (or unvoluntarily suffering relocation expenses or losses as a result of your source of income) gives you a tax credit, valid for the next 10 years.
orijing 15y ago
Exactly. Unfortunately, there are so many special-interests and lobbyists who will fight dollar-for-dollar to keep their special perks. Why else could it be that the most profitable industries (like oil) have some of the biggest allies in Congress?
shawnee_ 15y ago
Good analogy. Although I've mentioned this before here, it's relevant; the way the tax law was originally put into effect was very smart and not complicated at all. ($4000 in 1893 ~ $100K today) (1) Zero tax on any person making under $4,000 per annum (2) Begin graduated tax rates on person making $4,000 or more per annum (with special attention paid to trustees and other persons whose income source is derived from estates) (3) All corporations with profit subject to tax http://books.google.com/books?id=ogUNAAAAYAAJ&pg=PP1#v=onepage&q&f=false http://books.google.com/books?id=ogUNAAAAYAAJ&pg=PP1#v=o... Very simple. If the original tax code were dropped into place today, it would be greatly simplified for most people. However, I disagree that tax laws need to be simpler for high-income, high-volume franchises. Following the original program analogy, it's necessary to be very strict and put many layers of control around processes that have the ability / potential / likelihood to zombie. I guess that's where we are today with the US tax code: zombie processes' wasting CPU (GDP) pretty much hijacked the whole system.
- Canada 15y ago
  Zombie processes aren't scheduled for execution and therefore don't consume CPU resources.

tzs 15y ago

Tax laws generally start out simple, then get complex patching holes. My favorite example. Once upon a time a long time ago, a company wanted to pay a dividend to shareholders. That would be taxed as ordinary income to the shareholders. The company's accountants had a brilliant idea. 1. Do a stock split. Say, 105 for 100. 2. Do a stock buyback, where the company buys back 1/21 of the outstanding shares. Net result to shareholders: every 100 shares becomes 105, then the company buys back 5 out of every 105, leaving the shareholder with 100 and some cash. Since the cash came from the sale of stock, it's capital gains. The tax code was fixed so this would not work, by inserting a new section that gives conditions that a stock buyback must meet to be considered a stock buyback. If it fails to meet the conditions, it is considered to be equivalent to a dividend distribution and taxed as such. The conditions have to take into account a bunch of factors, so as to not penalize legitimate buybacks but not leave holes that allow abuse. I believe that a large part of the complexity of the tax code comes from this kind of thing.

wisty 15y ago
Why should income and capital gains be taxed differently anyway? If it's to stop Grandma getting hit with a huge marginal tax when she sells her house (despite it being a once-off kind of thing), just introduce some kind of smoothing. If your income is uneven, the tax man can give concessions (if you get a lot of money after a period of low income), and rebates (if you have a low income period after making a lot of money). Easy, right? No more need for tricky rules about how to move money between the different categories.
- roel_v 15y ago
  Because of incentives, because the actions that created the capitals gains in the first place were already taxed, to be able to correct for the self-employed who incorporate vs those who don't (situation of getting dividend on 5 stocks Coca Cola is very different from being a sole proprietor and paying yourself effectively through dividend), to keep the administration sane (how can you smooth a windfall like selling a house? You'd have to do it over 10 years or so, how are you going to keep track of that? What if the person moves, across the country or abroad? etc...) None of it is as simple as it looks - there is a reason we ended up in the situation we are now. Nobody likes it, the IRS itself the least. It's not a matter of saying 'oh let's just start from scratch'. (See also: 'second system syndrome', which applies to law just as much as to software)
- dantheman 15y ago
  Because income and capital gains are two different things. Capital gains should be lower because there is a risk that you may lose money, if you add a high tax on top of that lots of investments become not worth it.
  - yaix 15y ago
    If you start a company and then pay yourself part of the earnings, there is a risk too that the company goes bankrupt. If you specialize in an industry and get a paid job, there is a risk too that you dont find a job or get laid off. I dont see how the risk of capital investments is any different to other kinds of investment that would justfy it to be taxed differently. A better explanation would be the higher capitalization of the groups lobbying for a lower tax for that income group.
  - sqrt17 15y ago
    The problem with this way of thinking is that, this is not necessarily true: Regular ways of getting income also make you take part in the risk of whatever or whoever you get your income from, and as a result, more and more things that would be income get wrapped into capital gains. The fair thing to do would be something where losing money (or unvoluntarily suffering relocation expenses or losses as a result of your source of income) gives you a tax credit, valid for the next 10 years.

orijing 15y ago

Exactly. Unfortunately, there are so many special-interests and lobbyists who will fight dollar-for-dollar to keep their special perks. Why else could it be that the most profitable industries (like oil) have some of the biggest allies in Congress?

shawnee_ 15y ago

Good analogy. Although I've mentioned this before here, it's relevant; the way the tax law was originally put into effect was very smart and not complicated at all. ($4000 in 1893 ~ $100K today) (1) Zero tax on any person making under $4,000 per annum (2) Begin graduated tax rates on person making $4,000 or more per annum (with special attention paid to trustees and other persons whose income source is derived from estates) (3) All corporations with profit subject to tax http://books.google.com/books?id=ogUNAAAAYAAJ&pg=PP1#v=onepage&q&f=false http://books.google.com/books?id=ogUNAAAAYAAJ&pg=PP1#v=o... Very simple. If the original tax code were dropped into place today, it would be greatly simplified for most people. However, I disagree that tax laws need to be simpler for high-income, high-volume franchises. Following the original program analogy, it's necessary to be very strict and put many layers of control around processes that have the ability / potential / likelihood to zombie. I guess that's where we are today with the US tax code: zombie processes' wasting CPU (GDP) pretty much hijacked the whole system.

Canada 15y ago
Zombie processes aren't scheduled for execution and therefore don't consume CPU resources.