Wednesday, April 11, 2012

April is the Cruelest Month

Judging from my conversations with friends and colleagues, I must be one of the last people in the United States to prepare my own taxes.

I do this masochistic ritual every spring.

Because I am in the financial advice business, and a good deal of my daily work involves advising clients on tax efficient investment strategies, I feel that it is a good exercise for me to actually get into the nitty-gritty of preparing tax returns.

But what a horrendous experience!

It's not that I actually use pencil and paper to fill out tax forms - Turbo Tax is a marvelous program, and every year it offers new features to try to make the tax preparation experience more bearable.

No, what really makes it hard is trying figure out how best to comply with our federal and state tax laws.

Like most people, I consider myself a fairly honest person, and I try my best to follow the government's rules.

At the same time, I always have the feeling that I am paying too much.  Every year, after I have filed my taxes, I always have the uneasy feeling that I have overpaid.

But my limited tax knowledge is the government's gain, I guess.

Turns out that I am not alone in my thoughts about taxes, at least judging from two articles in this morning's New York Times.

Eduardo Porter writes in a column published today:

Either you’ve hired an accountant to prepare your tax returns or you’ve spent countless hours plowing through schedule after schedule, noting deductions, exemptions and limitations and hoping the software you are using will get it right. Exhausted and anxious, you’re thinking surely there must be a better way. 
There are, in fact, more efficient ways for government to collect money. They are much less complicated. And they can raise a lot of revenue to solve our long-run budget deficit and pay for the increased benefits demanded by our aging society. What’s more, they can do so without raising income tax rates. Unfortunately, history suggests we won’t really consider these alternatives.

Over the years, there have been countless proposals to change our tax code.

Remember the "flat tax", where returns would be so simple that you could mail them in on postcard?

Or what about the value-added tax (VAT),which is widely used in Europe and is a relatively painless way to gather tax revenue?

Never happened.

As one of my professors at the University of Michigan explained to me years ago, the more efficient the tax code the less opportunity for governments to try to model the behavior of its citizens.

Unfortunately, in our zeal to allow governments to use taxes as a sort of "carrots and sticks" incentive system, our tax code has becomes so perverse and byzantine that only full-time practitioners can really "game" the system.

Take for example the use of private jets by corporate executives.

According to an article written by Steven Davidoff in the Times's "Dealbook" section, it is becoming more common for corporate executives to be able to enjoy the use of a private jet as a tax-free perk even if the flight is for personal use.

How can they do this?

As Mr. Davidoff writes:

... directors often dole out personal safety perks to ease a chief executive’s tax bill. By classifying the benefits as security measures, the executives typically get a better tax treatment on the services.

It’s a common corporate tax trick.

Each year, companies spend millions of dollars to ensure the ostensible safety of their executives, services that sometimes extend to others. Ford, for example, picks up the tab for family members who fly with {Ford CEO Alan} Mulally. The automaker estimated that it spent $178,571 on Mr. Mulally’s and his family’s personal air travel last year. Ford declined to comment.

Hence, to quote TS Elliot, April truly is the cruelest month, at least when it comes to taxes.