Taxation – American Style
If you’re a typical taxpaying citizen, you get to work on your income tax return each year by February. Your collection of records and receipts are normally in your tax preparer’s hands in mid-March, with the electronic filing complete before the April 15 deadline. Those of you whose return is somewhat more complex may try to speed things up a bit, but your agenda is much the same. Unless your financial affairs consist of little more than wages or salary, you’re probably only vaguely aware of the complexities of the calculations or the detailed intricacies of your tax return.
Once upon a time – way back when – most of us prepared our own returns and mailed them directly to the tax collector with check enclosed. A classic cartoon by Norman Rockwell, America’s most prominent illustrator, whose cartoons graced the covers of The Saturday Evening Post for many years, shows citizen Joe Doaks at the kitchen table, pencil in hand amidst piles of receipts and records, while scrutinizing an income tax form. Taped to the wall behind him is the page of a calendar with a red crayon swirl circling March 15 – the date tax returns once fell due. This occurred long before H&R Block and TurboTax became household names.
Though the foregoing reference to tax return preparation by a taxpayer may seem to be nothing more than a frivolous trip down memory lane, there’s far more significance to the recollection than simply a touch of nostalgia. Consider, if you will, yesteryear’s taxpayer involvement in the process. The individual paying the tax actually prepared the form for the prior year’s income, then dug out and inserted the allowable deductible items, next determined the taxable income, then calculated the tax due, and finally prepared and mailed a check for the full amount to the Internal Revenue Bureau – somewhere along the way they softened the title to Internal Revenue Service. Isn’t it clear that, under these circumstances, the government cannot easily hide from the payer exactly what’s taxed, at what rate the tax is assessed and that payment is a forced extraction? However, the scene I just described is a time long passed. Much of what occurs in modern life is no longer an involvement in the details of living. Rather, it’s relegated to automation, where the distinction between reality and fantasy is obscured, and to most citizens the concept of taxation is as remote and thoughtless as Facebook or constant involvement with a smartphone.
At this point it pays to take a closer look at what government is all about. Essentially, its principal function is passing other peoples’ money around, with everything else secondary. And inasmuch as the authorities are unable to generate money from their own endeavors, they must somehow glom onto whatever they can lay their hands upon – wherever. And how this is normally done can be summed up in a single word: taxes. Regardless of location, party denomination or political structure, just as an army reputedly “travels on its stomach,” a bureaucracy travels on its citizens’ billfolds, and everyone who enters government service sooner or later comes to share this attitude. Left to the devices of the officials, there’s no limit to the amount to be collected, and any attempt by the payors to minimize the tribute will be met with the usual warnings of dire consequences that never end. In California, home of the famous (or infamous) Proposition 13, the initiative measure which in 1978 cut property taxes by half and limited future increases to 2 percent per year, the tax beneficiaries to this day blame every malady except the sinking of the Titanic on the passage of that proposition. The fact the state and all its political subdivisions are literally awash in money does not dampen the enthusiasm of many to rescind the law.
Perhaps an excellent illustration of the impossibility of reigning in an out-of-control tax system is a review of the Tax Reform Act of 1986. The act was inspired by President Ronald Reagan in the hopes of reducing burdensome taxes imposed on the American public. Upon the pretext of both simplifying the code and reducing tax rates, we witnessed the top rate cut from 50 percent to 28 percent, while many tax shelters were done away with. Those changes included the curtailment of the deduction on IRA accounts, an added restriction on households with pension plan coverage and, most notably, elimination of the deductibility of interest on consumer loans such as credit cards. As presented, the act was declared “Revenue Neutral,” meaning taxpayers – collectively – pay no more taxes than in the past. Whether or not the lauded “tax cuts” proved at the time to be of benefit to an overtaxed society is questionable, but with the passing of years, as the tax rates again rose whereas the deductions never returned, it’s clear how it turned out: Mr. and Mrs. Taxpayer ended up further in the hole. If there’s a lesson to be learned, it’s that despite President Reagan’s noble intentions, his approach proved simplistic, for it ignored both the details and a view of the future. The governmental functionaries control the legislative apparatus and are thoroughly entrenched, with time on their side.
Let’s now skip to the bottom line and consider where our technological advances are taking us. Few persons actually prepare their tax returns anymore. Although the forms from the IRS can be downloaded on your computer printer, it’s no longer fashionable to do so. Instead, you’ll more likely insert called-for information on a printed questionnaire from your tax preparer, designed to be used to keypunch data into a computer program from which your completed tax return will appear. In all likelihood the final tax you pay will be in accord with the numbers fed into the program. It’s equally likely neither you nor your tax preparer will display much cognitive insight into the intricacies of your particular tax circumstances, nor the appropriateness of what the machine spits out. You must both take on faith you’ve paid the taxes required of you.
We’ll now fast-forward a generation or so. The accountants who once carefully analyzed their clients’ financial affairs and prepared their tax returns so to most favorably take advantage of the laws in effect will have retired or passed on to that great cash receipts journal in the sky. No one will be left to serve the beleaguered taxpayer except the keypunch operator and the software programs approved by the tax collector.
A final suggestion: For those of you willing and able, I recommend you prepare your tax returns as I do – and these include your personal as well as corporate, partnership and trust returns if applicable. On each computer-printed IRS form, with pencil and eraser firmly grasped, you systematically insert the data from your personal records, just as Joe Doaks did back in the 1940s. When you’ve completed everything as thoroughly and accurately as you can, your completed returns then go to your tax preparer – preferably a competent account – whose job will be to transfer your work onto the electronic systems on which they’ll be filed, as well as to correct any of your mistakes. And the benefit: You’ll always be abreast of your operation and the complexities of the tax laws you’re involved in. This may not be perfect, but it’s the best you can hope to do.
Al Jacobs, a professional investor for nearly a half-century, distributes a monthly newsletter in which he shares his financial knowledge and experience. You may view it on www.roadwaytoprosperity.com/.