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Comment by rayiner | Hacker News Reader

> Between this and intentional complexity of the tax system that hinders

Can you give me an example of this "intentional complexity?"

The income tax is complex for two reasons: 1) it's inherently difficult to define "income" in a practical way; 2) it's a tool used to further all sorts of economic and political policies.

The best class I took in law school was Federal Income Tax (I'm not a tax lawyer). It really showed me that things which seem unnecessarily complex, like depreciation schedules or the treatment of capital assets, exist to solve theoretical problems that can be analyzed mathematically.

Finally, it's not like accounting, pursuant to GAAP, is simple. And it seems obvious, to me anyway, that tax law must be at least as complex as accounting.

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> The income tax is complex for two reasons: 1) it's inherently difficult to define "income" in a practical way; 2) it's a tool used to further all sorts of economic and political policies.

3) It's probably the top target law for being gamed/interpreted in a creative way. The more loopholes are patched the more patches there are to find loopholes in.

The complexity for income tax law stems from tax breaks. There are all these different ways for people to pay less in taxes, but each rule for paying less has its own set of instructions and there are criminal and monetary liabilities for filing incorrectly. So it can be said that if you just pay your income taxes as they come and don't claim any deductions, you are essentially over paying in taxes. Another problem problem that arises from this system of tax breaks is that it allows people receive more or less in deductions based on their life situation which is inherently inequitable.

Tax law doesn't have to be so complex though. For example, you could just have a simple income-bracketed flat tax that is just at a lower rate than current taxes without any deductions possibly. Or possibly better yet, you could get rid of the income tax all together and just use a federal tax on sales, real estate and money transfers out of the country. Granted, this would give the government more direct control over how much money is being collected on a daily basis and could result in some people feeling like they need to have a party with tea, but assuming we do live in a democratic society, something like a sales tax would be more understandable and visible to everyone (as the rate would be printed on all of their receipts) and it would probably lead to more oversight of the tax by the taxpayers rather than everyone just being concerned with paying less than they are asked to each year without getting audited.

I'd say there's two types of "intentional" complexity. There's the complexity that comes about because we feel like some actions should receive preferred tax treatment over others. So, tax expenditures like student loan and mortgage interest deductions and so on. They had some complexity because "we", as a government, decide to do that.

But the darker side is the complexity that exists to let people with enough income and the means to obfuscate their true tax rate. We may have a top marginal rate of 39.6%, but even people who have a huge income pay nothing close to that. And it's in high income people's interest to keep it that way. It's also in the interest of the companies we're talking about to keep the tax code complex both because they're run by high income people and if the general population has a sense that the tax code is super complex for themselves, they're more likely to use tax preparers even if they actually have very simple taxes or just mildly complex.

So, yes, with a huge economy the tax code is going to be very complex. That's just politics and the nature of the beast, but there's more complexity than there needs to be because of interests who drive it to complexity for their deadweight gain and strive to keep it complex.

Surely we can define what is income, what is not, and how its treated for taxation purposes in less than seventy thousand pages?

It is complex and it is intentional, this is how politicians reward those whom they appreciate and "punish" those who they do not appreciate. You can move from the non appreciated column through proper donations either directly or through advocacy groups or lobbying firms hiring the correct people. No, I am not being cynical, I wish I were

An example of the problem: Describe in appropriate level of detail what a "royalty" is and where it originates. Please note that you must be as robust against edge cases as a login form or you will cost the country hundreds of billions of dollars.

If you can do this in under 100 pages, you're doing really well.

It doesn't matter what a royalty is or how it works, any more than it matters what any other income source is; it's a payment you receive. Why distinguish between royalties and other forms of income?

The problem only gets complicated when you try to set policies using the tax code, to incent or discourage specific behaviors by making them more or less beneficial. A tax code that treated all sources of income as identical would get far simpler.

But not all payments you receive are income, and not all income is a payment you receive. See: http://en.wikipedia.org/wiki/Haig%E2%80%93Simons_income.

Say I'm a shopkeeper. I sell you a candy bar for $2.00, and receive a payment for that amount? Is that my income? No. The credit card processing fee, the cost of getting the candy bar delivered from the wholesaler, and the cost of the candy bar itself must be paid out of that $2.00, but do not represent changes to my own wealth. Deductions exist to go from "gross income" (the payments you receive), and "taxable income" (the amount that your wealth actually increases).

Now, say I'm a farmer. I buy a new tractor. I should be able to deduct the cost of that tractor from what I make selling my crops. But should I get to take the deduction for the full value immediately? No! Unlike a candy bar, which is gone as soon as the customer purchases it, the tractor is a capital asset (an asset that is used to produce income). When I buy a tractor, my wealth just changes form: I have less cash, but I have a tractor. Over time, the value of the tractor will decrease. Eventually, the full cost of the tractor should be deductible, but because the tractor will help produce income over many years, the deductions should be taken over many years. Otherwise, because of the time value of money, the taxes paid will understate my actual increase in wealth. This is what "depreciation" is all about. Because it's impractical to actually sample the change in value of the tractor each year, it happens according to fixed "depreciation schedules." And when you sell the tractor, the difference between its market value and its value according to the depreciation schedule generates income or loss that must be accounted for.

Now, say I own a house (or stock). It's value goes up every year, which represents an increase in my wealth. Should I pay the IRS a tax each year based on an estimated amount? That would be very inconvenient, so we have a whole system of "realization events" that define when continuous changes in wealth must be "sampled" and tax paid.

As I noted in my post, a lot of this complexity just falls out of accounting. You're right that the various measures to use the tax code to create incentives/disincentives also complicates the situation, on top of the inherent complexity. But it's not a given that the value of these incentives/disincentives is less than the burden of the additional complexity.

So all you have to do is change society so that people want to treat all income as equally taxable. Simples!

For those of us that don't know much about royalties, can you explain why is it any harder (accounting/tax-wise) than a variable-rate monthly subscription?

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