I am extremely grateful that my birthday is not on April 15. Otherwise, a significant conflict of interest would arise in my house, and I am not sure if I would have ever gotten a birthday cake.
Growing up, there was always one day of the year that caused me to quiver in fear. It was marked on every calendar in our house with an ominous red circle. This date is April 15: Tax Day. What to many people might be just another balmy spring day is a harbinger of stressful late nights at work for my father, an accountant. Even for those who have no interest in business, it is imperative, as a contributing member of society, to be informed about what accounting, and taxes in general, entails.
Zimbabwe was once plagued by horrific inflation. With the turmoil in the region, it is unsurprising that collecting taxes was not done efficiently, nor was it a priority.
In every stable country in the world, a tax code exists. How the taxes are issued varies. There are multiple kinds, each with their respective strengths and weaknesses.
A progressive tax imposes a higher tax rate as the base increases; a regressive tax imposes a decreasing tax rate. It is important to note that for these two types, there is a marginal tax rate, based on tax brackets. Income is split up into different levels, and we are taxed for each level under which earnings fall.
This is a chart depicting the American income brackets and the corresponding tax rates. With the increased focus on the 1%, people have argued that more brackets should be created with higher tax rates.
Those of lower socioeconomic status laud the former because it ostensibly makes the system fairer: the more you earn, the more you pay. The problem with this approach is that the incentive to earn more no longer exists because a substantial fraction of the money will be taken away!
The latter, on the other hand, is supported by the wealthy, who claim that by spending less on taxes, they have more to spend on businesses. This money will eventually “trickle down” to other workers through increased hiring, a school of thought known as supply side economics.
On paper, the “fairest” option is the proportional tax, in which the tax rate is fixed. No matter how much you earn, you pay the same fraction of your earnings to the government.
The Tax Code is overly complicated and can be inefficient.
A major shortcoming of each type of tax is that its implementation is extremely complicated. Calculating taxes is an arduous, complex task that can take months. Unsurprisingly, conservatives often rally for tax reform during elections, claiming that our current tax code is inefficient.
A fourth type of tax is the simplest kind: a lump tax. No matter how much you earn, you pay the same flat fee. This could be onerous for people who earn little and would otherwise pay no income taxes under the marginal tax rate system; it also could be unfairly beneficial for the wealthy who would otherwise have had to pay substantially more.
In America, GAAP, Generally Accepted Accounting Principles, dictates that we use the progressive system. Even so, there are many loopholes that people exploit to save money.
Not only do taxes harm both producers and consumers by deducting their surplus (area marked tax revenue) but it also results in a deadweight loss, where no one benefits!
Americans might be divided on many issues, but they are united in their hatred toward taxes. Economists are similarly against the concept, albeit for a different reason. The government, by implementing taxes, tries to make the markets fairer and more efficient. In reality, what often results are increased inefficiencies. In addition to taking a long time to go into effect, taxes create a deadweight loss. Goods become more expensive for firms to produce, and more expensive for consumers to buy. Consequently, both consumer and producer surplus decrease, no matter who the tax is imposed upon.
Though socially gauche to say, accounting is essentially a profession that stems from and capitalizes on a deadweight loss. All the time, energy, and money spent on calculating taxes could have been spent elsewhere. And yet, since everyone, from individual to corporation, is forced to pay taxes, accountants are a necessary part of the smooth running of our society.
You might have seen a sign like this while driving. The highway is a public good, and no one is going to fund its maintenance-unless, of course, they get recognition for doing so.
Taxes are also beneficial because they finance things like infrastructure and education. In economics, these are considered public goods, which are non-exclusive (can be used by everyone) and non-rivalrous (can be consumed by many person without limited use). The problem with such a good is that people will not pay to use it because they reason that another person will pay for its use. The freeloader effect results, whereby goods are exploited and used inefficiently. To avoid this issue, taxes are imposed in order to force everyone to bear a share of funding public goods. As a result, everyone complains about paying taxes together.
And with that, may your tax returns be ever in your favor today!
