5 ms·

Being someone who has some experience with tax law, the cycle of tax complexity goes like this: 1. Tax law is passed. 2. Really smart CPAs and Tax Lawyers fig

Being someone who has some experience with tax law, the cycle of tax complexity goes like this: 1. Tax law is passed. 2. Really smart CPAs and Tax Lawyers figure out ways to legally avoid paying taxes. 3. Tax people issue regulations intended to close those loopholes. 4. Administrations change and they want to win votes and tweak the economy so they lower some taxes and add tax breaks. 5. New administration comes in and selectively reverses previous administration's program because of politics. 6. If the tax is international tax, then add really smart tax lawyer doing multi-jurisdictional tricks to lower taxes (e.g Double Irish With a Dutch Sandwich[1]) , governments trying to encourage multi-nationals to do business there by adding incentives to their tax code, the OECD coming in and trying to standardize tax stuff across jurisdictions to prevent this, individual pairs of countries doing tax treaties with each other, etc. [1] https://www.investopedia.com/terms/d/double-irish-with-a-dutch-sandwich.asp https://www.investopedia.com/terms/d/double-irish-with-a-dut...

cperciva 3y ago
None of this complexity is from trying to plug tax loopholes. Most of it is from politicians wanting to name things. For example, for decades Canada has had a "personal amount" tax credit -- for arcane reasons, rather than saying "the first $X of income isn't taxed", the lowest tax bracket starts at $0 but there's a non-refundable credit equal to the lowest tax rate times $X. Then a politician came along and said "we should increase the personal amount so that people can earn more money without paying taxes... but we don't want to decrease taxes on the top 1%". So now we have a "personal amount" which depends on your income. Similarly, in BC we have the "BC Tax Reduction" which is an extra tax credit given to people with incomes between (roughly) $22k and $36k. Both of those examples could have simply been implemented as tax brackets but voters get far more excited about a "Tax Reduction" than they do about a new tax bracket.
- p_j_w 3y ago
  >Both of those examples could have simply been implemented as tax brackets but voters get far more excited about a "Tax Reduction" than they do about a new tax bracket. Doesn't sound like the problem is entirely on the politicians here.
  - int_19h 3y ago
    The temptation of populist pandering is always there, but the whole point of representative democracy is (supposedly) that politicians can resist it and do the right thing regardless.
- jessriedel 3y ago
  > None of this complexity is from trying to plug tax loopholes. Most of it is from politicians wanting to name things. The effect you describe is very real, but "loop hole closure" is certainly a source of complexity too, e.g., the US's insane alternative minimum tax (AMT), which nearly duplicates the amount of tax work to be done by insisting you compute your taxes under a second set of assumptions. The idea was to make sure people who were using "loopholes" (or just like, reasonable features of the tax system) to pay at least above a certain amount. Of course, the sane solution would have been to choose tax policies that combine together reasonably. As always, loopholes (in the sense of "unjustly low" amounts of tax) are much more likely to be created rather than fixed by complexity.
  - TimPC 3y ago
    AMT is also completely insane when it interacts with legitimate deductions and deferrals that aren't loopholes. For instance stock options from start-ups for stock that can't yet be sold.
    - quink 3y ago
      Ah, yes, what a horrible, awful burden the... consults notes... top 0.4% of taxpayers in the richest country on the planet are being asked to live with. I'll go find a tiny violin so I may weep for them. Edit: Hang on. I was wrong, I apologise. It would be a subset of those 0.4%. Now I'll have to find an even tinier violin. Edit 2: Investopedia says "The AMT is charged when you exercise your ISOs, hold on to your shares, and sell them after the calendar year in which they were awarded to you." OK, TimPC, can you just straight up tell me what size violin I should be aiming for?
      - cbsmith 3y ago
        I think it's 0.1% of house holds, but it's not strictly the top 0.4% who are impacted. The more you make, the more likely it is that you are impacted, but your household income can be just a couple hundred thousand a year and you could be impacted.
      - 3y ago
AlgorithmicTime 3y ago
[dead]
phpisthebest 3y ago
I have a problem with calling explicit exemptions, call outs, and other things as "loop holes" as if they were no intended to be used to avoid taxation. This is simply incorrect, organizations, people, and groups all lobby the government to include their pet line item as an exemption, deduction, or credit. These are not "loop holes" and a CPA or tax lawyer having the knowledge to fully utilize all of them is not " legally avoid paying taxes" as those taxes where not owed in the first place. In order to get to the point where paying the correct amount of taxes you owe by law is "using loophole to avoid taxes" one has to assume 100% of all income is belongs to the government and we are just figuring out how much the government is going to allow us to keep. I reject that
- amarshall 3y ago
  Loopholes exploit ambiguity or complexity in rules in ways that betray the authors’ intent. Following this definition, there’s no need to conclude that “100% of all income belongs to the government”.
pembrook 3y ago
You could stop all of this at Step 1 by just having a flat tax. On everything. The loopholes only exist due to the unnecessary complexity of tax laws. Preferential treatment for investments over labor? No. Preferential treatment for real estate? No. Preferential treatment for corporations over people? No. Preferential treatment for 3-legged nymphs who live in a flood zone? No. …Etc. Then the market would be free to allocate human efforts to those which provide the most value. The amount of human productivity wasted over this topic is insane. Millions of people devoted to creating complex riddles and then disentangling and/or manipulating those riddles—-with zero proof there’s any beneficial outcome from said complexity.

cperciva 3y ago

None of this complexity is from trying to plug tax loopholes. Most of it is from politicians wanting to name things. For example, for decades Canada has had a "personal amount" tax credit -- for arcane reasons, rather than saying "the first $X of income isn't taxed", the lowest tax bracket starts at $0 but there's a non-refundable credit equal to the lowest tax rate times $X. Then a politician came along and said "we should increase the personal amount so that people can earn more money without paying taxes... but we don't want to decrease taxes on the top 1%". So now we have a "personal amount" which depends on your income. Similarly, in BC we have the "BC Tax Reduction" which is an extra tax credit given to people with incomes between (roughly) $22k and $36k. Both of those examples could have simply been implemented as tax brackets but voters get far more excited about a "Tax Reduction" than they do about a new tax bracket.

p_j_w 3y ago
>Both of those examples could have simply been implemented as tax brackets but voters get far more excited about a "Tax Reduction" than they do about a new tax bracket. Doesn't sound like the problem is entirely on the politicians here.
- int_19h 3y ago
  The temptation of populist pandering is always there, but the whole point of representative democracy is (supposedly) that politicians can resist it and do the right thing regardless.
jessriedel 3y ago
> None of this complexity is from trying to plug tax loopholes. Most of it is from politicians wanting to name things. The effect you describe is very real, but "loop hole closure" is certainly a source of complexity too, e.g., the US's insane alternative minimum tax (AMT), which nearly duplicates the amount of tax work to be done by insisting you compute your taxes under a second set of assumptions. The idea was to make sure people who were using "loopholes" (or just like, reasonable features of the tax system) to pay at least above a certain amount. Of course, the sane solution would have been to choose tax policies that combine together reasonably. As always, loopholes (in the sense of "unjustly low" amounts of tax) are much more likely to be created rather than fixed by complexity.
- TimPC 3y ago
  AMT is also completely insane when it interacts with legitimate deductions and deferrals that aren't loopholes. For instance stock options from start-ups for stock that can't yet be sold.
  - quink 3y ago
    Ah, yes, what a horrible, awful burden the... consults notes... top 0.4% of taxpayers in the richest country on the planet are being asked to live with. I'll go find a tiny violin so I may weep for them. Edit: Hang on. I was wrong, I apologise. It would be a subset of those 0.4%. Now I'll have to find an even tinier violin. Edit 2: Investopedia says "The AMT is charged when you exercise your ISOs, hold on to your shares, and sell them after the calendar year in which they were awarded to you." OK, TimPC, can you just straight up tell me what size violin I should be aiming for?
    - cbsmith 3y ago
      I think it's 0.1% of house holds, but it's not strictly the top 0.4% who are impacted. The more you make, the more likely it is that you are impacted, but your household income can be just a couple hundred thousand a year and you could be impacted.
    - 3y ago

AlgorithmicTime 3y ago

[dead]

phpisthebest 3y ago

I have a problem with calling explicit exemptions, call outs, and other things as "loop holes" as if they were no intended to be used to avoid taxation. This is simply incorrect, organizations, people, and groups all lobby the government to include their pet line item as an exemption, deduction, or credit. These are not "loop holes" and a CPA or tax lawyer having the knowledge to fully utilize all of them is not " legally avoid paying taxes" as those taxes where not owed in the first place. In order to get to the point where paying the correct amount of taxes you owe by law is "using loophole to avoid taxes" one has to assume 100% of all income is belongs to the government and we are just figuring out how much the government is going to allow us to keep. I reject that

amarshall 3y ago
Loopholes exploit ambiguity or complexity in rules in ways that betray the authors’ intent. Following this definition, there’s no need to conclude that “100% of all income belongs to the government”.

pembrook 3y ago

You could stop all of this at Step 1 by just having a flat tax. On everything. The loopholes only exist due to the unnecessary complexity of tax laws. Preferential treatment for investments over labor? No. Preferential treatment for real estate? No. Preferential treatment for corporations over people? No. Preferential treatment for 3-legged nymphs who live in a flood zone? No. …Etc. Then the market would be free to allocate human efforts to those which provide the most value. The amount of human productivity wasted over this topic is insane. Millions of people devoted to creating complex riddles and then disentangling and/or manipulating those riddles—-with zero proof there’s any beneficial outcome from said complexity.