My Bro is an EA. Sure, he doesn’t do the taxes for any Insurance co- they are done by large teams of CPA’s. But for a normal business, a few hours on the computer with the spreadsheets and you’re on your way- once everything is set up properly that is. It’s not easy, I concede- but the bulk of the time and effort already is expended to follow GAAP.
Doing a full set of B&R by GAAP is quite a bit of work, true. The point is- the difference in time to add on the Tax rules once you have followed the GAAP rules isn’t all that significant. Again, for a large insurance company, things may be rather different, I don’t know.
Heck, most public companies I know keep three sets of books, the GAAP books for financial disclosure, the tax books for the IRS and the internal accounting books so that management has some flipping clue what is going on.
The insurance industry is a pretty special situation, they are one of a few industries that virtually operate under their own tax system and just about every complication in Subchapter L is something they likely lobbied for. I would say that pointing to insurance as an example would be like me pointing to Hawaii and saying that the United States is not in North America.
The book tax difference is more than just trivial for many public companies. However for the typical non-public company (the vast majority of companies out there), the book tax difference is pretty trivial because there is no incentive to try to get off balance sheet accounting or to try and recharacterize debt and equity and all sorts of other crap (BTW, these companies all have to file a form that specifies the boook/tax differences). For most non-public companies, the financial accounting generally tends to follow tax accounting pretty closely, which makes reconciling book/tax differences pretty trivial.
My tax-related experience is with large telecom and insurance companies, which have foreign-sourced income, consolidated ownership structures, and entire departments devoted to tax methods and compliance. I admit that this may not be easily generalized to smaller businesses, or ones in less regulated industries.
Nevertheless, the cost of compliance is real–the IRS itself, which has no incentive to exaggerate costs, estimated the cost of individual income tax compliance at $87 billion in 2000. (And that’s valuing individual time at only $20 per hour.) I can’t cite their figures for business compliance costs, because they haven’t figured out how to compute them yet. (And yes, book/tax overlap is one of the factors which makes calculation difficult.) No matter what figure they eventually arrive at, total compliance costs will be a substantial fraction of the money raised.
Looking at the article, the vast majority of the cost is in preparer time. It is not clear if a reduction in this would lead to economically rewarding activities, and thus economic benefit to the country. I think one must be careful to avoid the impression that people are laying out $87 billion for tax preparation - unless you care to assign a cost to TV watching. Plus, $20 an hour is about $40 K / year (assuming 50 weeks of work) which is not too low.
It is also not clear how much of the record keeping cost you can assign to taxes. My wife is self-employed, so we probably spend more than the average, and she spends a lot of time on record keeping - but almost all of it would be done anyway.
Actually, if you calculated the cost based on the real salaries and hourly rates of people, it would probably come out worse, since those with little income will spend relatively less time than those with higher incomes. On the other hand, some of this time is spent ennumerating deductions and the like, and perhaps there is a monetary payback for the time.
Well insurance companies are unique tax animals and telecoms generally operate under a different depreciation regime. Subchapter F and consolidated returns alone would require massive tax support but is this really the “tax burden” we are concerned about?
I guess that the answer would be to have a simpler tax system but I can tell you from years of experience with the tax code, the simplest tax sytem becomes cumbersome in an effort to prevent tax dodges and to build in all sorts of goodies for constituents. I remember having an argument with someone at Treasury about a specific provision in a code section that could only possibly apply to one corporation (do a search for “headquarters” in the Code), I was basically told to shut up.
If you beleive that our government needs revenues and that a tax system is the most practical method of collecting those revenues, then you have to accept that there will be costs assocaited with administrating a tax system. The focus should be on making it more efficient not making it free.
Having read Payne’s article, even if his figures are correct (and they seem poorly supported), Tinsley’s numbers are wrong. Tinsley claims that Payne said 65% of the money collected for taxes is spent on “operating” costs. No, what Payne actually claimed is that for every tax dollar collected, there is an additional hidden operating cost of 65 cents. That figure would work out to a 39% loss overall.
There is an economic benefit to TV watching – it’s an end rather than a means to an end. The benefit might not be monetary but is real. Of course it might not be worth $20 an hour, and it certainly won’t offset tax revenues by that much.
Similarly, one can ask if the accountants that would be unemployed were a simpler tax code out there be doing as “productive” a job? Sure, anything is more productive in actuality than filling out complicated taxes, but it might not be something that society values at $80K a yr (or whatever tax accountants make).
Your first sentence is correct but I question the second. Here is a scenario: I have $30,000 to invest in my business. I want to buy some computers. These depreciate over 3 years. If I go out and spend all $30k on computers, at the end of the year I will be able to claim one year’s depreciation amount as an “expense” against taxes. I now have to find the money to pay tax on $20k profit that doesn’t really exist - or at least I don’t have the cash to pay the tax as I have spent it on computers. So what happens in reality is that I have to invest less so that I can afford to pay the tax. So depreciation means that I invest less in my business.
There have been initiatives to help small businesses in this area such as allowing them to expense up to $100k of what would normally be capital expenditure (and subject to depreciation). This means that the entire amount can be offset against taxes in year 1. Of course, there may be more taxes to pay in years 2 and 3 than when one is using depreciation, but at least you have the opportunity to earn some profit as a result of your investment so you can pay the taxes.
Most businesses purchase capital assets (especially Real Estate) on Credit, thus they don’t pay out the entire purchase price in the year of purchase- so why would they get to write it off all in the year of purchase?
I didn’t say anything about how I think the system should or should not work. I just pointed out, with an example, that depreciation rules do not encourage investment. What you actually did is give another example of the same thing.
The problem is that this is simply shuffling money from one hand to another without generating any actual useful wealth – essentially, it’s a case of the broken window fallacy.
Nor did Payne (or Tinsley) consider the negative operating costs of reducing taxes. For example, if we reduced taxes, we would also reduce the need for IRS agents, tax lawyers, accountants, court officials, etc. These people, thrown into unemployment, represent the hidden “operating” cost of decreased taxation.