Nobody likes taxes. Ok, fair enough — a few wackos here and there do, but whoever say they like taxes generally mean that they like it when others pay taxes. Either because that directly benefits them in the form of free goodies on the other side of that magic Government coffer, or because they get a warm fuzzy feeling from seeing rich, successful people getting stripped of their belongings.
I don’t have any impact over how taxes are levied or that they are in the first place. Childishly, I can advocate for zero all I want, but that’s not going to happen. But you don’t have to be a raving, mad libertarian to think that there’s something off with most countries’ tax codes.
They’re a mess. Nobody can get a grasp of it; you need professionals to understand it, enact it, object to its outcomes, and investigate what exactly you do or do not owe in taxes.
Our tax regimes in the West are set up on mid-20th century time, and haven’t really kept up. They presumed that everyone had an employer — often the same one over your life — that did the same routine business year-in and year-out, nobody moved constituents, and nothing ever changed.
As soon as we add dynamism here, it gets hard. When people move across state lines or government jurisdictions, they’re subject to another set of rules that they don’t understand and can’t really investigate. When the nature of their work changes — their pay, their remuneration package, side hobbies, or in some countries even family structures — how they are taxed changes.
Our systems aren’t set up for people working in one country, living in another, or frequently moving to a third or a fourth. That wreaks havoc with all kinds of tax-related events.
Minor changes and patchworks that happen from time to time won’t cut it. Unfortunately, it takes something like a financial crisis, a banking collapse, or a massive public finance incidence for us to completely overhaul and update the tax code. And then life and technology moves on, two decades later leaving us once again with a tax regime that’s not quite suited to what we do. In between we fuzz around the edges and trash-talk our political opponents for daring to suggest something as awful as changing a handful of rates a few points up or down. Big-freakin-deal.
Even before those concerns, people who run business as sole traders or small businesses — the vast majority of commercial enterprises — have a hard time projecting their tax bill. If you commision me $100 work, I couldn’t even tell you how much of that I’ll pay in taxes — it depends on what costs I had on that transaction, if you’re a EU citizen, if you’re a private enterprise or a VAT-registered company, what social insurance rate I have opted for, and probably the nature of the work. As a rough guess, the taxman will come for me for between $20 and $40 of that Franklin.
It’s not that I just don’t know or I’m too lazy to figure out, it’s that I literally cannot tell you until all the accounts and tax reviews are done in the beginning of next year. It’s hard to tell up-front. It doesn’t take a conspiracy theorist to consider that they probably want it that way. Elusive. Opaque.
Every month, I send a payment of $425 to the tax authority, based on an estimate for the calendar year 2020 I made in January (and updated in April after corona). That sums to $5,200, which is not my final tax bill — deductions, local taxes, capital gains taxes, and other subsidies must be added. Let’s say I end up paying $4,000, net of everything.
If my revenues, costs, or deductable activities change in between, the final settlement will be netted out next year. I literally put some numbers into a black-box calculator and get an official paper back: pay us this every month.
Why? Don’t know. How did you arrive at that number? A tad unclear.
I often wonder if it’s even worth it. Not the paying part, which certainly isn’t, but what we’re arguing over. In a given year, I probably spend twenty or thirty hours on the phone with tax assistant at the tax authority — and maybe twice that reading rules, saving receipts, doing accounts.
There are two sides to the coin here: the time and effort I have to waste, and the time and effort they (and in turn the rest of society) have to waste because the tax code is a jungly mess.
First, mine: let’s say 25hrs on the phone (or waiting in line…) and 50 hours on administrative bureaucracy. An honest, comprehensive estimate for how much value I could create during that time is easily in the thousands of dollars. Net benefit? At best, a few Franklins at tax time for filling in the right form and claiming the correct deduction. By wasting my time, the tax requirement hoops have squandered these resources that now could not be brought into existence.
Second, theirs: Now, the tax assistants who have the great misfortune to investigate my accounts, validate my payments and returns and answering my calls don’t suffer a loss when I’m in an automated phone system — but on the other hand, they must do work behind the scenes, processing my numbers and approving the returns. Let’s say the full extent of answering all my questions, validating and approving my returns, assessing my updates etc is a similar 25 hours. Then they have coffee breaks like everyone else, and then they have peak demand for their services too, where for the rest of their time they lull about. Say, effectively, for every person like me the tax authority needs to hire 40 hours worth of labour — a standard work week. Stated differently, one tax handler could manage about 45 of people like me (vacation weeks!) provided they call at different times and ask questions sequentially.
The tax authority needs to pay something like $50,000 in salary and payroll taxes to employ this person. That’s around $1,000 per week, appropriately covering those 40 hours of service and effort that I required.
That’s a gain for the state, no? You cost around a thousand bucks, but you bring in around $4,000.
Not so fast. By having this entire apparatus in the first place, you squandered easily two weeks’ worth of value production — say $1,500. Moreover, my entire tax revenue was not at stake in my hours of conversing with the manhandlers of the system. Usually, it’s a handful of minor instances like where to register one-off work income, or a missing (but immaterial) form. Last year, one source of concern was a $750 travel reimbursement I had received for attending a conference. American IRS had withheld $225 of that, which per tax agreements ought to have been credited to my Swedish tax bill.
I went through about four different people at the tax authority since nobody knew how to deal with this, each one of them having to do some investigation. After a number of hours work on their part over a few weeks — say 10 hours in total— and an amount of anger and annoyance on mine — say infinity — they established that yes, my tax bill would be reduced by $225, but only half this year and then, if approved, the other half next year.
We weren’t arguing over the whole $4,000 amount; we were spending extra time and effort for $112.50. For me, that makes sense; a decent amount of money, I’m keen to learn, and I’ll squeeze whatever I can from their greedy claws. For them, however, it most certainly doesn’t. Even had they kept the money, that wouldn’t have covered the time these administrators had to spend on my case.
Here’s my rough modest proposal. For every SME small enough not to require formal auditing, having fewer than, say, 5 employees, or earning revenues below, say, $250,000 — don’t bother. Revoke all tax they pay, free them from all VAT paper work and filling out forms up-front. Whatever their actual concerns, whatever the “true tax” is according to the law of the land, it’s just not worth bickering over. It’s not worth the admin people’s time.
Yes, yes, I’m talking my own book here, as that would make life a lot easier for me — and free up a decent chunk of my revenue each month. Isn’t that the entire point? It’s not enough money for the Government — regardless of what it aims to spend it on — to care about. It has lots of deadweight loss, and lots of useless efforts wasted in squeezing through regulatory hoops. It has great value to me.
I see a beautiful, mutually beneficial trade here. Leave me alone.