Tuesday, April 18, 2006

The Ease of Doing Taxes

Gary Becker complains that we spend too much time and money complying with the complex tax code.

I would separate the complexity of tax calculation into three kinds:

1) Complexity of a purely mathematical kind: the number of figures which have to be considered and all the additions, subtractions, multiplications, and divisions which have to be performed on them. In the modern world, this kind of complexity should no longer be of any significance since it can all be done by computer.

2) Recordkeeping: the burden of monitoring economic activity and recording transactions in a form that tax software can work with. Since almost everything can now be paid for electronically, it is also within our power to make this very easy if we choose.

3) Legal judgment: the need to know which provisions of the tax code can be or should be applied, and how transactions can be or should be characterized (e.g., whether an expense is deductible or not). This will be harder to computerize than the first two elements. Nevertheless I foresee that future taxpayers will be able to do this quite easily with the aid of sophisticated software.

There are some short-term obstacles. Some people still do not have computers, or credit cards. People may prefer recordkeeping to be difficult: for example, online businesses and their customers have an incentive to plead difficulty in calculating state use tax, and thereby avoid paying it, although recording and collecting the tax would in fact be very easy. But in the big picture, it seems to me that escalating complexity of the tax code will not be able to keep up with Moore's Law, and paying one's taxes is going to get easier and easier.

I predict, for example, that tax preparation will not be a growing profession in coming years, although like secretaries and travel agents, tax professionals will not become wholly extinct.


At 8:26 AM, April 18, 2006, Blogger Jordan said...

NJ has the right idea. All my information went to the state electronically, and all I had to do is log into the state tax webpage, answer a couple of questions, and then my tax return was filed and a refund put into my bank account. Less than 10 minutes.

Why can't the IRS do this for federal returns? It's surely in their interest to make their own online system so it's not going through some private middleman who charges $30-$50 dollars. I'm sure they'd be happier if people like me (i.e. tech savy people who use many online services for finances and have poor handwriting) didn't mail in their taxes.

At 11:06 AM, April 18, 2006, Blogger Richard Mason said...

Supposedly, if your income is not too large, you have free filing options for federal returns. For example, TurboTax is supposedly free if you are under 50 and your adjusted gross income is under $50K.

I didn't e-file, but I did use fill-in PDF forms for the federal returns and printed out the filled-in forms. That would obviate the handwriting issue.

California also has fill-in PDF forms, but the fields for your last name and your social security number were screwed up! (Same fields for spouse were okay.)

At 2:07 PM, April 18, 2006, Blogger Joe said...

I used free Turbo Tax this year. It got me a larger refund than I would have figured, and I'm 85% sure it did so legitimately. It also took way more time than filling out the 1040EZ like I normally have, but MI's state form instructions didn't account for the possibility that you filed a 1040EZ. Turbo Tax is a good way to go if you don't have pesky things like investments or a big income. Maybe otherwise too, but I can't vouch for that.

At 11:16 PM, May 22, 2006, Anonymous Anonymous said...

So why can't I P on your blog? Thats P as in paragraph, HTML. Not something else...
Anyway on taxes I disagree.
I forget who said, more or less, that people are inclined to believe the most ludicrous things when their self-interest is at stake.
Self-interest is at the heart of the tax code. Pay Uncle less, keep more. Sometimes this is ok, sometimes it is not. Like most rules of this sort, the boundary is kind of gray.
Empirically, the boundary of tax law can only be determined by reading tax court cases. After all, who cares if some complex rule written in the legislature is violated, if -- in fact -- no one really cares enough to catch and punish people over it. How much work would it be to reduce the case law to its digital essence? If you could, would it be rationalizable, or would it resemble some bad Trek episode where Kirk psychologically destroys a computerized nemesis by alerting it to its own irrationality.
Add to this the fact that regulations and laws change every year, and you'll see why taxes are such a pain in the ass.


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