Taxes

Let He Who Is Without Error Conduct the First Audit

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While researching today's column, I came across a 2010 report (PDF) from the National Taxpayers Union that summarizes various experiments showing that professional tax preparers disagree about the proper way to file returns for hypothetical families. Worse, the people conducting the experiments—including the Government Accountability Office, which consulted with experts at the Joint Committee on Taxation—could not definitively say who was right and who was wrong. The report describes a 1998 study by Money magazine:

All 46 tested tax professionals got a different answer, and none got it right. The professional who directed the test admitted "that his computation is not the only possible correct answer" since the tax law is so murky. The tax computed by these professionals "ranged from $34,240 to $68,912." The closest answer still erred in the government's favor by $610.

Discrepancies also show up in returns completed on different tax preparation sites. "As the Tax Code turns ever more unwieldy," USA Today noted in 2007, "deciphering it has become more art than science."

As I argued in a 2006 column, this indeterminacy undermines the rule of law. Since it is so hard to know when you are complying with the law and when you aren't, even the most conscientious taxpayer cannot contemplate an audit with equanimity. Odds are you've done something wrong, even if you don't know what it is.

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  1. Obfuscation is the only antidote when one who wishes to hide something can only do so in plain sight. And since everyone hypothetically can read the tax code, only solution is to make it completely inscrutable. Keeping such a powerful social mechanism a black-box to the public is genuine power.

  2. Fair Tax

    When you’ve bought something, you’ve paid your taxes. That’s pretty simple.

    1. Black Market Due To Fair Tax

      When you’ve bought something under the table, you have avoided paying taxes. That’s pretty simple – and uneconomical.

      1. Umm. You’re under the impression that everyone is paying their taxes now? You can’t be that stupid.

        [currently,] When you’ve sold something under the table, you have avoided paying taxes. That’s pretty simple – and uneconomical.

        1. Re: kilroy,

          You’re under the impression that everyone is paying their taxes now?

          Who gives a shit, k? You’re the one espousing the “fair” tax; I am merely showing you how people can avoid it as well.

          1. You don’t see the Fair Tax as an improvement over the rigged, expensive, bullshit system we have now because it’s not totally flawless?

            It’s massively more transparent than any form of income tax and a lot more resilient to political pandering.

            Surely you see that.

            1. Re: kilroy,

              You don’t see the Fair Tax as an improvement over the rigged, expensive, bullshit system we have now because it’s not totally flawless?

              Well, choosing between a complicated evil and an easy one is still choosing an evil.

              1. Agreed. If you see a possible way of avoiding the evil altogether, speak up.

            2. Surely you see that.

              No

              The “fair tax” can be infinitely manipulated by exemptions and varying rates.

              1. Really? So you think your tax will be tailored to your political influence when you get that new Mercedes. I doubt it.

                1. Voluntary tax system.

                  The government sends you a letter saying how much tax you owe. If you don’t pay they release your name to the local newspaper so that they can shame you infront of your neighbours.

                  Or they’ll tweet how bad you suck for not supporting ROADS and/or TROOPS.

                  1. Shame works well in clan strucutures but fails when put in place with larger groups. BK and foreclosure today has significantly less stigma than it did even a decade ago.

                    1. Re: Schempf @10:52

                      Dude, you have no idea. I took a class where the professors gave suggestions about how to relieve the shame that used to be associated with bankruptcy and foreclosure (and overtly lamented shame’s existence in these matters). Indeed, part of a lecture centered around how to beat foreclosure when declaring bankruptcy. Double whammy!

                      That said, considering our banking elites have no shame in shunning previous obligations, and have sidestepped bankruptcy proceedings because it would just kill them, why should the people who owe them money care? For a futile gesture of honor? It’s like the draft. Fuck it. Don’t scream and hold rallies, just burn your card and walk away, If enough people do, what are they gonna do? Throw everyone in jail?

                  2. I think the actual enumerated functions of the government are legitimate and need to be generally funded. That, IMO, consists of about 15% of the current federal government. If the country’s military is protecting the security/wealth of everyone, I’m ok with everyone being required to contribute. It’s the current scope of the government and the manner in which it’s perverted/incentivised that I see as the issue. I don’t think a voluntary tax will work, at least not in the short term.

                  3. You could actually have a voluntary tax system, by tying an offer of tax payment to an expectation of budget size (ie, your personal take on your fair share), and letting the process go on until enough people either lower their expectation of budget or raise their willingness to pay such that the sum of offers is enough to satisfy the desired budget.

                    It would function a bit like an auction (and like an auction, would require that offers be legally binding commitments once the budget is set). Of course, it would also almost certainly be regressive, but that doesn’t mean it would be unfair.

                2. I think the concern is Mercedes tailoring the tax system to subsidize their customers.

                  1. I think the concern is Mercedes tailoring the tax system to subsidize their customers.

                    *cough* healthcare *cough*

            3. You don’t see the Fair Tax as an improvement over the rigged, expensive, bullshit system we have now because it’s not totally flawless?

              Consumption taxes are regressive

              I would prefer a flat progressive income tax

              say 15% with people paying nothing on their first $20,000.

      2. The fair tax is beautiful.

    2. Or you could you just have a land value tax, in which case renters wouldn’t have to bother with it at all anymore. It’s all going to be passed through anyway, and you can’t exactly put land under the table.

      1. Renters would pay for it through increased rents……

        1. Missed your pass through comment. Funny how a bottle of wine can do that.

      2. I know a number of people who are proponents of a land tax. They all also seem to want to tie the right to vote to land ownership.

        1. Can’t say I would go that far — the government can take a lot of things from people besides their stuff, and when it comes to life and liberty, we’re all in the same boat.

          Although, given how democracy predictably devolves into a circular heist, I could see eliminating the tax power altogether and funding the U.S. through a number of reverse joint-stock corporations (where buying shares obligates you to pay proportional to the shares you own, rather than receiving a dividend, with the total payment being voted on by shareholders). Ideally, there would be a funding corp for every major federal agency.

          But, critically, those institutions would have no power but revenue collection, and then only from their own members.

        2. I favor a SINGLE (and I mean the single part) land tax and dont see the need to tie voting rights to it.

          A land tax is the only tax I can support as not being obviously immoral.

          1. A land sales tax is the only tax I can support as not being obviously immoral.

            That’s my position. So, what do we do now? Kill each other?

          2. FFFFUUUUUUU joke handles!

  3. This wouldn’t be a problem at all if we just stuck to my plan and have the federal government tax 100% of the income from all people and then distribute it back equally among all people so that everyone gets the same check.

      1. I always fess up to my spoofiness. And the first comment was my spoof. The second Tony comment was not my workings…. and I’m beginning to wonder if the real Tony chimed in thinking “hey, I like the way my spoof is thinking.”

        1. Yes, I like it.

    1. You’d still have to define income, which is the source of significant amount of the murkiness in the tax code.

      1. Uhhh… Spoofy spoof!

        Right?

        1. I mean, really: Define income? What are you, some kind of tax protester?

          Government does not bother with no stiking definition of income!

          http://video.google.com/videop…..867390173#

          1. Actually, whether something is “income” is, in fact, a genuine issue under the Internal Revenue Code. In fact, there was an infamous (in the world of wonky tax lawyers and accountants) Supreme Court case regarding exactly that question – what is “income”? The case was http://en.wikipedia.org/wiki/C….. Glass Co.

            The crazy fucking government economists and fuzzy-headed ivory tower university types have all kinds of bizarre theories about what “income” actually is and how it should be taxed. My favorite (sarcastically speaking) is “imputed income”. You comb your own hair? Well, by doing it yourself, you save the amount of money you would have spent to pay someone else to do it for you. To the extent you saved the money you otherwise would have spent, you have a greater amount of wealth at the end of the year than you would have if you had paid someone to do it for you every day, so we can impute that you have some income represented by the amount of money you saved by combing your own hair.

            I’m not making that up.

            1. Ooops, I goofed the link.

              The case was Commissioner v. Glenshaw Glass Co.

  4. All the more reason to make congresscritters do their returns in a live webcast, with an open comment bar. You’d see simplification in a hurry, with great fun meanwhile.

    1. Someone (Dave Barry?) suggested they be required to do returns with pencil and calculator, locked behind bars without food. I like your idea better.

      1. I don’t see any difficulties in combining these two ideas.

  5. All 46 tested tax professionals got a different answer, and none got it right.

    How did Money know what the “right” answer was?

    Also, having been audited, I assure you the IRS professionals are just as clueless.

  6. As I argued in a 2006 column, this indeterminacy undermines the rule of law. Since it is so hard to know when you are complying with the law and when you aren’t, even the most conscientious taxpayer cannot contemplate an audit with equanimity. Odds are you’ve done something wrong, even if you don’t know what it is.

    That’s, uhhhh, kind of the point.

    1. There’s no way to rule innocent men. The only power government has is the power to crack down on criminals. Well, when there aren’t enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws.

      Or something like that.

      1. They think the computer can’t make a mistake.

        1. Yes, well…

        2. The computer has to be programmed by a person who understands the tax code. It will repeat the same manual process, just faster…

          1. Probably offshored.

        3. Now you’re talking!

      2. They think the computer can’t make a mistake.

        The computer has to be programmed by a person who understands the tax code. It will repeat the same manual process, just faster…
        reply to this

        Threaded comments strike again? Because neither of these actually seem like replies to NelfMo’s point.

    2. Undermining the rule of law is a feature, not a bug.

      Obama just talked about raising taxes on the rich. Nobody really knows who will pay or how much.

    3. That’s the point – and it isn’t just the tax code.

  7. I came across a 2010 report (PDF) from the National Taxpayers Union that summarizes various experiments showing that professional tax preparers disagree about the proper way to file returns for hypothetical families.

    Which is why I simply employ the short form, rely on the standard deduction plus child credits, and get shafted like a good little serf.

    1. The trick is to find somebody who will itemize EVERYTHING for you, and guarantee their work against audits.

      My wife and I go to somebody like that, and even without kids, we usually get a couple of grand back. We have the correct number of withholdings on our w-4s, but this chick we go to gets deductions for home improvements, state sales taxes, on and on and on, to where we always come out ahead.

      Unfortunately it’s a bit of a drive for you to come up to Dallas, but I’m sure you can find someone like that down in your neck of the woods. She charges us $250, but it’s always worth it because we always get back way more than we would using the standard deduction, and with kids, you’ll really rake it in. We compare every year to doing it ourselves using the standard form, and we always come out at least $800 shorter of what she gets us.

      1. Sounds like a lot of receipt tracking….

        1. Nah, we just make sure our estimates are within the ballpark of reality, i.e., don’t get greedy with it.

          1. “Don’t get greedy” with your own money sounds almost as complicated.

            1. It’s your own money, to be sure, but I’m not talking about the morality of the system itself, merely how best to game the system we’re currently stuck with. And I do not feel one ounce of shame at wringing every shady dollar I can back out of the IRS. They stole it to begin with.

  8. But Kindly Old Grandpa Buffett does his own taxes, on the back of an envelope, with a number two pencil. He says it’s a piece of cake; he just wishes the government would charge him more.

  9. I hear taxes are really simple in Somalia, maybe you should move there if you don’t want to be confused.

    The warlords holding an assault rifle to your head while they take all your possessions and rape you with Christmas ornaments are pretty simple, too.

    1. Re: Hobie Hanson,

      I hear taxes are really simple in Somalia, maybe you should move there if you don’t want to be confused.

      I hear taxes are really complicated in Venezuela, maybe you should move there if being confused is your cup of tea…

    2. Re: Hobie Hanson,

      The warlords holding an assault rifle to your head while they take all your possessions and rape you with Christmas ornaments are pretty simple, too.

      “Government builds roadz!!!”

    3. Hobie lad or lassie, I want YOU to enlist in Bloody Barack’s AfrikaKorps to provide some boots on the ground. Stop living on the back of the working class and give something back.

    4. Yep, I prefer it when a SWAT team looking for illegal plants holds an assault rifle to my head while they declare my possessions guilty of crimes and then shove a police baton up my ass. Because the baton is much smoother than a christmas ornament, plus they don’t use that commie AK bullshit like third world primitives. Thanks taxes, for giving us civilization!

  10. Odds are you’ve done something wrong, and you don’t know what it is.

    ftfy. leaving in the possibility that someone might actually know what they did wrong is intellectually dishonest.

  11. What’s your alternative to the fair tax, Old Mexican and the rest?

    1. Flat (or even progressive) income tax with minimal deductions, taxing the states per their representation and letting them figure out how best to raise the funds, land value tax, extracting tribute from the EU and Western Hemisphere, or we could take a page from California and just grab everything that isn’t nailed down as “unclaimed”.

      Oh, SOMD: all taxes are theft, of course.

      1. extracting tribute from the EU and Western Hemisphere

        Hey, now you’re onto something.

        I hear the unemployment problem is worst among the young anyway, we could solve two problems at once.

        It’s going to take some — persuading — to extract all that tribute. But why try extracting it from the EU where there are easier targets closer to home?

        1. But why try extracting it from the EU where there are easier targets closer to home?

          Dude. You read my mind.

        2. Targets closer to home that aren’t in the Western Hemisphere?

          1. Targets closer to home that aren’t in the Western Hemisphere?

            Sort of a tough condition to meet, huh?

          2. But why the EU?

            1. Anyway, we’re splitting hairs here guys. The important thing is extracting the tribute.

              Wow, finally my big break. Do you know how long I’ve been unemployed? And the UN can’t get in the way because we’re going to leave national borders intact. National borders have religious significance to the EU.

              Come to think of it though, the EU deserves to be paying some tribute….

      2. Land taxes are inherently unfair. You never own your land and unlike an income tax a land tax has no relationship to one’s ability to pay it. Better a flat tax with a high personal adjustment.

    2. What’s your alternative to the fair tax, Old Mexican and the rest?/i>

      No taxation whatsoever.

      Any money the government wants they can print. The IRS can be eliminated and all the tax accountants can actually be put to productive use.

      30% annual inflation will wake up the zombie citizens; those that remain comatose deserve to be fleeced.

      1. F’in tags

  12. One of the merits of land value taxation is that isn’t complicated the way the Internal Revenue code is. (Try Googling on “land value taxation” or “Henry George”.) You would just ge a postcard saying, “You own a lot x feet by y feet in an area where land is asessed at z cents per square foot, so your bill is xyz. If you believe this assessment to be in error, contact the Appeals Office; otherwise, send in your check.”

    LVT is good from a libertarian perspective, because it doesn’t require the government to inquire into the details of your finances, your family relationships, the condition of your roof, what causes you contribute to and whether they are considered legitimate charities, etc. They just need to know that you hold a certain plot of land. If you can’t or won’t pay, the natural consequence is the civil remedy of taking the land. There would not normally be any need to throw you in jail.

    1. LVT is good from a libertarian perspective

      Except for the part where you’re renting your property from the gov’t. Aside from that, it’s just peachy.

      I’ve been debating, with myself, how to tax people the most fairly. Sales tax seems to be the only answer.

      Taxing Income leads to too many loopholes, and taxing property seems (to me) to invalidate the whole idea of personal property.

      Tax Sales AND NOTHING ELSE. (you get one stream of revenue bitches, make it work)

      1. “Except for the part where you’re renting your property from the gov’t.”

        Strictly speaking, you’re renting the land — LVT is different from property tax in that it excludes developments.

        While troublesome, it’s less troublesome than the idea that you’re renting your own time and labor, which is what the income tax represents.

        There’s also the fact that land in the economics textbook sense isn’t something you create, it’s just a raw natural input into human wellbeing. There are practical utilitarian reasons for assigning property rights to land, but there’s much less of a moral argument for saying a person deserves ownership of a plot of land, relative to the moral argument for owning the product of your labor.

        And, frankly, there’s the practical fact that states are defined by their borders — that is, by their sovereignty over certain pieces of land. If you aren’t sovereign over that piece of land, then even with no tax, you still retain it at the pleasure of the government. May as well tie their capacity to tax to the thing that limits and defines them.

        1. While troublesome, it’s less troublesome than the idea that you’re renting your own time and labor, which is what the income tax represents.

          Sounds Ok, go on.

          There are practical utilitarian reasons for assigning property rights to land, but there’s much less of a moral argument for saying a person deserves ownership of a plot of land, relative to the moral argument for owning the product of your labor.

          And here’s where I start to disagree.

          And, frankly, there’s the practical fact that states are defined by their borders — that is, by their sovereignty over certain pieces of land. If you aren’t sovereign over that piece of land, then even with no tax, you still retain it at the pleasure of the government.

          And here’s where I think you got the relationship backwards.

          1. And here’s where I start to disagree.

            With the relative ordering of the right to property from labor and the right to property from nature? Could you elaborate?

            And here’s where I think you got the relationship backwards.

            Have you ever heard the saying “You and what army?” I like AnCaps, I think their world sounds really great, I just don’t see it ever happening — not just due to current political trends, but due to human nature.

            1. With the relative ordering of the right to property from labor and the right to property from nature? Could you elaborate?

              I can’t, because I don’t understand the challenge.

              1. Was suggesting right to property produced by working land (as it derives from self-ownership) more defensible than right to land (as it derives from “I was there first”, mainly).

                Either could be justified, but one is intuitively (to me) easier than the other.

            2. Have you ever heard the saying “You and what army?”

              Yes, I have, and that’s why I pay my taxes, since I don’t have a competitve armed force.

              1. Assumed you meant that people ought to be sovereign over land. Seemed unlikely unless you’ve got a nuke wired to explode when your heartbeat stops. Maybe misunderstood your point.

            3. also, please place the AnCaps reference for me, I’m ignorant but interested.

              1. AnCap = anarchocapitalist. Implausible society (moreso than minarchy and LVT and ending the war on drugs and other libertarian wishlist agenda items, I mean), though certainly desirable.

          2. Virtually no one owns “the product of their labor”. Everything most people own they did not make, they purchased. No different than purchasing land.

            I don’t see how you can demote ownership of land as being a lesser form of property right without also demoting ownership of just about everything.

            Even the product of your labor is derivative of other people’s labor, unless you that chair you made is built out of wood you grew, and built tools made out of iron that you smelted and forged, with coal you dug, etc.

            1. I wish I could afford to hire RC to make my points for me. He’s way better at it.

            2. Everything most people own they did not make, they purchased. No different than purchasing land.

              I’m starting to regret even mentioning LVT, since it was just one of many alternatives to fair tax I threw out. Don’t take me for a proponent, although I do think the arguments in favor are interesting.

              Nevertheless, the difference is that the things that you purchase were the product of someone else’s labor, traded in exchange for the product of your labor. Whereas the land you purchased… was just there. You trace that object back through the supply chain, eventually it comes down to natural resources + a lot of human labor. You trace the land deed back, you eventually get to some intrepid explorer, squatter, or (more likely) king saying “mine!”.

        2. And who determines the proper land value? Lets see, what about that piece of land that you rent out as farm land to avoid a much higher valuation in an area zone for commercial development?

  13. Odds are you’ve done something wrong, even if you don’t know what it is.

    Not at all. I’ve done some things
    “wrong”, and I know exactly what they are.

    1. But see, I really don’t care what you’ve done.

      The question I’m interested in is, what have you got? [that I can take]

  14. Paying taxes is for those who are too lazy to start their own country.

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