Taxman Cometh




“Should five per cent appear too small. Be thankful I don’t take it all. ‘Cause I’m the taxman, yeah I’m the taxman.” -the Beatles 

Deep sighs of relief abound as another Tax Day has come and gone. But if you listen closely, those sighs aren’t the only sounds you can hear. You can still hear the sounds of people grumbling about their taxes.

Grumble, Grumble

People grumbling over taxes goes way back. Yes, even before 1966 when the Fab Four’s George Harrison penned his critique, aggrieved parties in Boston held their tea party and sent a tax message back accross the pond to England. While the issues have changed, it remains true that no one really likes paying taxes. Nor thinks all aspects of the U.S. tax code make sense.

Tax Day

April 15th is a day that almost everyone knows to be an important one. It is arguably the most known date that is not a national holiday or one that appears on a religious calendar. For sure, it’s also a date that’s much more important for those who owe taxes versus those who by this date have already spent their tax refunds on consumer electronics or otherwise put the funds back into the economy.

But one thing that has changed is what Tax Day looks like at the local post office. Remember when there actually used to be traffic jams around U.S. Post Offices on Tax Day?  Youngsters will someday find this hard to believe. Local news teams covered the annual ritual with gusto. For those trying to get anywhere by car, it was necessary to select alternate travel routes.  I think people even sold coffee and donuts out front. These days, not so much.

Sweet Redemption

Another reason that April 15th stands out is that it is that one day in the year where the tables get temporarily turned. It’s a bit illogical, but it’s a day where events that seemed bad when they happened now become worth something financially. Did you sell your house or shares of stock at a loss? Or maybe cringe as you wrote out those alimony checks? What about paying mortgage interest, PMI, and real estate taxes? Perhaps you awoke to find your pockets empty after a long fuzzy night in the casino? Or maybe even experienced something as terrible as death in the family.

But Oh Mother of Mercy and Sweet Redemption -these decidedly negative events may have positive value on April 15th! This could only pretty much be true in the topsy-turvy, upside down, mixed up shook up world of tax. Of course, deductibility of these events and any associated positive tax value may be subject to this, that, and the other limitation, exclusion, or exception. So check the code first, as should always be the disclaimer in the wacky world of tax.

Kramer : It’s just a write off for them .

Jerry : How is it a write off ?

Kramer : They just write it off .

Kramer : Jerry all these big companies they write off everything

Jerry : You don’t even know what a write off is .

Kramer : Do you ?

Jerry : No . I don’t .

Kramer : But they do and they are the ones writing it off .

No Taxes

Once upon a time, I had a job as the top finance person in a company. Accordingly I took great pride in the profitability and balance sheet strength the company had built. For as long as I live and probably even a bit longer, I will never forget the retired company founder, who had just returned from Florida one spring, telling me that I was not doing a very good job at all when it came to taxes.

At first this puzzled me, but then retired owner dude made it crystal clear that we should be paying a lot less in taxes. Retired owner dude apparently had met another similarly retired owner dude who had done quite well but paid very little in taxes each year. Right in line with our CPAs who had been similarly charged in the allegations, my response was to point out that since we were making money, we should expect to be paying some taxes. Silly me.

If you lock in on the mental imagery, you can surely picture these two retired owner dudes talking tax (or lack thereof) while feeding the sea gulls down in Florida- Gulf side of course – in their black knee socks, sandals, and Bermuda shorts!

Bad Policy

I’m no different from anyone else when it comes to having a few pet peeves around taxes. First and foremost, I tend to be critical of what I call “bad policy”. Simply put, this is what results when the tax code discourages the right behaviors from happening, or encourages the wrong behaviors, and in general does not serve the greater collective good of our great nation.

In my opinion, one excellent example at the federal level is found with the alternative minimum tax or AMT. Attempting to ensure that those at higher income levels take their share of the tax burden does not seem like such a bad thing. However, above a certain income level, several overly nasty, almost punitive, tax penalties kick in that discourage the right behaviors from happening. At least in some cases, folks wishing to avoid AMT magically seem to earn right up to the limit and then stop earning (and paying in additional funds to the tax kitty). Bad policy.

We should want these relatively successful individuals and small businesses to “keep going”, earning more and creating jobs as they go. Which obviously would be good for the greater good.

More Bad Policy

Another example is found in at least one state’s capital stock franchise tax. What it does is tax the retained earnings of a business. This is analogous to the government taxing the entire balance in an individual’s savings account. This does not serve well in attracting new corporate residents. Bad policy.

I know of a small businessman who is engaged in what is primarily a service business. His mistake is that he keeps some taxable retail stock on hand to service a very specialized and often medically referred subset of his clientele. He is quick to point out that he pays the same tax bill twice if the specific unit of inventory is on hand at the end of two successive tax years. Bad policy….Maybe he needs to winter in Florida to get some tax tips.

Real Alternative?

There’s a Stanford professor named Joseph Bankman, who advocates that the IRS should prepare our tax returns. His logic goes that employers and financial institutions are already sending the IRS our tax information, so why not let the IRS do the work for us? Critics point out that this reduces the involvement of taxpayers in the tax process, which then starts to sound like that whole taxation without representation thing all over again.

It seems that there is also a strong lobby against Bankman’s thinking. It turns out that the company Intuit thinks the IRS preparing our tax returns is a bad idea. Their product portfolio includes Turbo Tax.

As with most things, it pays to follow the money!



About Thomas W. Smith
Bizsinc - Bringing Business to Life

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