The jungle of tax reform

On Friday night I was like a kid half-heartedly doing his homework while watching the weather and awaiting the snowstorm. I kept thinking the storm would close school (government shutdown), and I could stop this blasted homework (my income taxes).

Then at the 11th hour (literally: it was a little before 11 p.m.), the House speaker emerged--worn, weary, but determined--and told us all that our elected officials had agreed on a deal and avoided a government shutdown. Hearing the news, I changed my plans for Saturday and shuffled off to bed, dreaming of incomprehensible forms that I’m convinced were developed by megalomaniac accountants who wanted to make their jobs more interesting and grandiose. For them, addition and subtraction just weren’t enough. They needed amortization, depreciation, basis points, and line-by-line instructions leading taxpayers in vicious circles of confusion that turn what should be a logical exercise rooted in deductive and inductive reasoning into pure hell.

After finally filing, I had a thought: At some level, I actually was hoping the government would shut down--resulting in worldwide uncertainty and thousands without paychecks--just so I wouldn’t have to face my dreaded 1040. What’s wrong with this picture?

I should point the finger at myself, but it’s much more fun to blame what everyone in America loves to hate: the tax code. Physicists have said that natural forces have simple, mathematical beauty, and if someone writes a sprawling equation, it’s probably not right. The mathematical beauty of a simple equation like e=mc² doesn’t take much to write, but it implies so much. A physicist would hate the tax code.

The tax code is so complex that it has bred entire industries for accountants and lawyers. It’s all a bit crazy. If government doesn’t tax enough, it continues to lose money and (at least eventually) makes it more difficult to borrow enough to keep functioning. If the government taxes too much, the citizenry feels the burden, stops consuming so much, and stymies economic growth. But the very way the government collects taxes forces many to pay someone else to fill out the tax forms.

Tax code reform is a perennial conversation piece in Washington, and much of it centers on the tax rates set by law. Warren Buffett famously said that, because most of his income comes from dividends, he pays a lower tax rate than do the people who clean his office. This year it’s about corporate tax reform--something that’s needed, considering that some businesses pay one of the highest corporate tax rates in the world.

We all seem to want a simplified tax code. Wouldn’t it be great if all individuals and corporations got a simple form with one box showing what was paid, another showing what is owed, and the third showing the difference?

Such simplicity may have consequences, though. Tax breaks add complexity, and people--including those running corporations large and small--want to keep those breaks. For instance, ESOP (employee stock ownership program) companies, the majority being small businesses, get significant tax breaks. Last year The FABRICATOR covered LeFiell Mfg. Co., an aerospace contract manufacturer and ESOP that puts 15 percent of worker salaries into individual ESOP accounts.

“You have to think like an owner,” said Butch Munson, manufacturing manager at the Santa Fe Springs, Calif., contract fabricator. “The more money you make for the company, the more money you get in your ESOP [retirement account].”

Most metal fabrication in the U.S. happens in small businesses, and some take the tax advantage of being S Corporations, in which shareholders are taxed but not the business. Michael Keeling, president of the ESOP Association in Washington, D.C., explained that because ESOP accounts are tax-deferred, S Corporation ESOPs actually avoid paying current federal income taxes entirely. On the other hand, tax benefits for ESOP C Corporations may be more beneficial, depending on the company.

OK, my head is starting to spin.

Such complications complicate tax reform. People want change, they want simplicity--but they want their tax breaks too. The tax code has evolved into a jungle with hidden treasures, and those persistent enough to find those treasures don’t want to lose them.

Of course, like my 1040 instruction booklet, this blog has hundreds of words describing a point that really could have been written in a sentence: Tax reform is complicated.