For Tax Law Issues (and Almost Everything Else), Do the Research and Communicate with an Expert

It’s been several years since I last wrote about the “size of Internal Revenue Code” – “size of tax law” debate. It gets to the point when I decide that the marginal benefit of providing the same explanation diminishes so much that those who understand have learned, those who cannot or do not want to understand will persist in their ignorance, and those who benefit of think they will benefit from publishing untruths aren’t going to be persuaded to take the side of integrity.

I have been addressing this issue almost as long as I’ve been writing this blog. My attempts to educate people began with Bush Pages Through the Tax Code?, and continued through Anyone Want to Count the Words in the Internal Revenue Code?, Tax Commercial’s False Facts Perpetuates Falsehood, How Tax Falsehoods Get Fertilized, How Difficult Is It to Count Tax Words, A Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone Viral, Weighing the Size of the Internal Revenue Code, Reader Weighs In on Weighing the Code, Code-Size Ignorance Knows No Boundaries, Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages, Not a Surprise: Tax Ignorance Afflicts Presidential Candidates and CNN, The Infection of Ignorance Becomes a Pandemic, Getting Tax Facts Correct: Is It Really That Difficult?, Reaching New Lows With Tax Ignorance, Incorrectly Breaking Down the Internal Revenue Code, Is Tax Ignorance Eternal?, So How Long Does It Take to Read the Internal Revenue Code?, Much More Than the Internal Revenue Code, and A Tax Expert Is Just a Phone Call or Email Away.

Yet sometimes it is valuable to revisit a topic that has been dormant for a while but has resurfaced. Why? If the resurgence continues to parrot the erroneous information, people who are new to the debate can be easily misled. This is especially so if they don’t take the time to do some research and evaluate what they are reading or hearing rather than simply taking everything they hear or read at face value. Sadly, that’s a pattern of behavior that has an impact far beyond the question of the size of the Internal Revenue Code.

Fortunately, there are people who know the realities of Internal Revenue Code size and who know it is a topic I’ve often addressed. Today a reader shared with me a link to an article on The Hill, in which Tobias Burns, writing about the current disputes and machinations about and at the IRS, claims, “The U.S. has one of the most complicated sets of tax laws in the world, spanning millions of words and tens of thousands of pages, excluding myriad pages of case law.” Had he done a bit of research he would have discovered that my last commentary on the topic also involved an article in The Hill written by Joseph Chamie. In A Tax Expert Is Just a Phone Call or Email Away, I criticized Chamie for writing, among other things, that “The tax code or Title 42 of laws that the IRS enforces involves no less than 2,600 pages or well over 1 million words.” Aside from noting his erroneous reference to “tax code or Title 42 of laws,” which was subsequently fixed, I also pointed out that the assertions about the number of pages and the number of words were wrong. At least Chamie provided the sources of his information, namely Vox and the Tax Foundation, though both sources were similarly at best exaggerated and at worst deliberately misleading. The Burns article does not provide any citations or other indications of where he obtained his information. Needless to say, what he writes in terms of pages and words is wrong.

As the title of my previous post, A Tax Expert Is Just a Phone Call or Email Away, it’s rather easy to get to the reality of Internal Revenue Code size. As I wrote in that previous post, “There are tax professionals who could have steered him to an article such as Andrew Grossman’s 2014 explanation in Slate, or goodness, to my ongoing thread addressing the issue.” Failure to do research and to check in with experts, I continued, “increases the circulation of ambiguous, inarticulate, and misleading information about tax law. I wish he had called or emailed someone who understands the scope of the Internal Revenue Code and tax law.” The same can be said about the need for research and checking in with experts in almost every other area of life.

Deciding Who Pays Taxes and If Businesses Should Pay Taxes

In You Pay ALL the Taxes, Tom Giovanetti of the Institute for Policy Innovation explains that “only people pay taxes.” He argues that in addition to taxes paid directly by individuals to taxing jurisdiction, individuals ultimately pay the taxes submitted by corporations and other entities because ultimately those taxes are passed on to the entity’s customers, shareholders, and employees. He is correct. When a business must pay a tax, it must recoup what it paid. It can select among one or more of the three options Tom mentions. It can raise prices. It can absorb reduced profits, which ultimately causes the return to shareholders or owners (in terms of dividends or stock or ownership value). It can refrain from raising employee compensation or raise it by less than it would have increased it in the absence of the tax.

Tom suggests that “If, in an ideal world, we had a zero tax rate on business income, as a consumer you would pay lower prices, as an employee you would earn more, and as an investor you would enjoy higher returns. Sounds great, doesn’t it? Except you’d also be paying higher taxes on your higher income and higher investment returns.” That’s true. He then adds, “But there would still be a net gain because of economic efficiencies gained through reduced compliance costs.” It is on this point that I want to comment about the incidence of taxes if business were not taxed.

I can best illustrate my point by posing a simple hypothetical. Suppose a taxing jurisdiction raises its revenue through a real property tax (though admittedly that’s not the ideal form of revenue generation but it works for purposes of the illustration). The jurisdiction has a 1,000 adult taxpaying citizens and two businesses. The value of Business One’s real property is $15,000,000. The value of Business Two’s real property is $10,000,000. Each of half of the citizens own real property worth $100,000. Each of the other half owns real property worth $50,000. For simplicity sake, I will assume all citizens are unmarried. Likewise, I will assume that all of the businesses’ owners, customers, and employees are citizens of the jurisdiction.

The jurisdiction provides one service, which is fire protection and fire fighting. All other services are provided by the larger jurisdiction, such as a state or county, in which the illustrative jurisdiction is situated. The cost of this fire protection and fighting service is $3,000,000.

The first alternative is based on the premise that only individuals pay taxes. Thus, the $300,000 is imposed on the real-property-owning citizens as follows. There is $75,000,000 of real property owned by the citizens (500 citizens x $100,000 plus 500 citizens x $50,000 [$50,000,000 plus $25,000,000). To raise $3,000,000, the real property tax rate needs to be 4 percent. So each property owner with a property worth $100,000 pays $4,000 real property tax, and each property owner with a property worth $50,000 pays $2,000 real property tax.

The second alternative includes the two businesses in the computation. In this instance, the taxable real property value includes both the $75,000,000 of real property owned by the individual citizens and the $25,000,000 of real property owned by the two businesses, for a total of $100,000,000. Now the real property rate drops to 3 percent. So each property owner with a property worth $100,000 pays $3,000 real property tax, each property owner with a property worth $50,000 pays $1,5000 real property tax, Business One pays $450,000, and Business Two pays $300,000. The two businesses can pass the taxes on to their owners, customers, and employees.

Is there a difference in what is called the incidence of the tax? Yes. Consider citizen A and citizen B, each owning a $100,000 property. Citizen A buys twice as much product from the two businesses as does citizen B. Under the first alternative, the two citizens bear the same burden of the tax, but under the second alternative citizen A bears a higher burden; the exact difference depends on how much of the real property tax paid by the businesses is passed on to customers rather than owners or employees. Or consider citizen C and citizen D, each owning a $100,000 property. Citizen C is employed by one of the businesses. Citizen D is retired. Under the first alternative, the two citizens bear the same burden of the tax, but under the second alternative citizen C bears a higher burden; the exact difference depends on what citizen C’s employer decides to do with respect to employee compensation.

The point is that the service for which the jurisdiction charges a tax has value to the businesses that benefits customers, owners, and employees in a proportion that is different from the proportion of real property owned by individuals. The same point can be made for other types of taxes used by the jurisdiction to fund the fire department but the computations are much more complicated.

The underlying problem is that the jurisdiction chooses to fund the fire department through taxes. Would it not be much better to fund the fire department through user fees based on the value of the protected properties. Of course, user fees are passed along to customers, owners, and employees. Does that or should that raise the same concerns about taxes that are passed along? No. Businesses pay other costs, such as utilities, insurance, security, and similar services. The costs of those services are passed along to customers, owners, and employees. They are the ones who should bear the burden of those costs.

Though not everything that taxpayers receive in exchange for paying taxes can be converted into a user fee, if user fees are adopted for everything that can be financed by a user fee, then the amount of taxes paid by businesses that are passed along to customers, owners, and shareholders is reduced because businesses would be paying fewer taxes and more user fees.

What about people who cannot afford to pay user fees? Presumably those people also face challenges paying taxes. Dealing with that problem requires examining a wider set of policies than simply taxation. It requires analysis of compensation issues, minimum wage amounts, the allocation of health care costs, and poverty reduction efforts, which in turn involves analysis of education opportunities, identification, prevention, and cure of mental health problems, elimination of domestic violence, and crime deterrence.

Incidentally, I chose fire protection and fire fighting services for a reason. Some might argue that it’s not the best example because many jurisdictions rely on volunteers and voluntary contributions to fund raising campaigns. Those days are rapidly passing into history. There is a nationwide crisis, as the number of volunteers decrease significantly, because deaths and retirements exceed new additions. The costs of equipment and training continue to rise, so many jurisdictions are facing the prospect of needing to fund their fire departments. This provides an opportunity to consider enacting user fees rather than taxes.

When Facts Change, Thinking Should Change

Reader Morris asked me an important question. It is important because it provides an opportunity to explain how a change in facts can and should change thinking.

Reader Morris pointed to a commentary I wrote back in August of 2004. In Equitable Taxation, after explaining why user fees are more appropriate in some instances than the federal income tax, I noted, parenthetically, “(Yes, I know that privatization of many government functions makes sense, and would shift charges from a "user fee" to a mere "private sector price" but I don't want to stray into that discussion at this time.)” Morris then pointed to my commentary in December of 2023, Should (Will) Implementing the Mileage-Based Road Fee Cause Privatization of Highway Infrastructure?, in which I wrote, “What I do not support is the privatization of government functions,” citing multiple posts in which I explained my reasoning. Those posts reached back to 2010.

Reader Morris phrased his question as an observation: “It appears that your position on privatization of government services has changed from 2004 to 2023.” He is correct. It did.

In Should (Will) Implementing the Mileage-Based Road Fee Cause Privatization of Highway Infrastructure?, I explained:

There are several principal reasons that I oppose putting public functions into the hands of those who control the private sector.

First, public-private partnerships don’t work out well, [citing a number of my commentaries dating back to 2010]. These posts pointed out failures in places like San Diego, Orange County, and South Carolina. The failure list grows, and now includes arrangements that did not work for the Interstate 69 project in southern Indiana, and the Pocahontas Parkway in Virginia. From the searching that I undertook, it appears that the problem is a global one and not limited to the United States.

Second, when public functions are re-routed into the hands of private sector businesses, voters lose the ability to control, vote out, or do much of anything with respect to the private entities now running government functions. It is a regression from democracy to a blend of feudalism and authoritarianism.

Third, these arrangements contribute to the corruption of government. They are the product of legislative attempts to find funding without raising taxes while generating revenue for their private sector donors, with hopes that the outcry against tolls and similar charges will be directed against the private entity involved in the project. When things go wrong, legislators don’t react because they perceive themselves at risk of losing funding from the favored private entities and thus at risk of losing the next election, something on which they focus too much.

Aside from the long-term disadvantages of privatizing public functions, the arguments offered in support of that path are flawed. To argue that privatization is “a concept supported by numerous studies showcasing the efficiency and performance improvements possible through transparent and well-structured public-private partnerships,” totally ignores the repeated failures, perhaps because from the viewpoint of the companies and individuals collecting public funds not only find these partnerships to be a success for themselves but manage to persuade everyone else that the success of these private sector participants translates to success for everyone, which is the opposite of reality. The claim that “The private sector has a proven track record of driving innovation in transportation safety” is hilarious when one considers the track record of the private sector when it comes to safety. Aside from noting the Corvairs and Pintos of the world, it has been government that has compelled the implementation of safety features and insisted on recalls due to flawed manufacturing despite the sing-song of the anti-government crowd that chants “we don’t need no regulation.” Yes, you do.

The claim that “Extending this partnership to infrastructure allows for the implementation of cost-effective technologies, ultimately making our roads safer and more efficient” ignores the reality that even if the roads are made safer and more efficient, a questionable claim in and of itself, it makes voter control more difficult rather than more efficient, it funnels public money into the hands of private individuals and companies, and in the long run it increases the cost to the public of using highways, bridges, and tunnels to levels higher than they would be if there weren’t a need to generate profits for those private individuals and companies.

It is sad and alarming that, yet again, when a good idea in the public sector begins to gain traction, the wealthy who yearn for even more wealth, and their acolytes, turn their thoughts into how they can milk more money from the proposal. Enough with the outsourcing of government to privateers.

What changed my mind? Facts changed. The theory of privatization met the practical reality of greed, corruption, and incompetence.

What led me to think, back in 2004, that privatization could and would work? The few instances of privatization that I had observed had persuaded me that moving those government functions into the private sector worked, and supported the proposition that many more could similarly work out as well. Here is an example. In high school I worked at a service station, which, among other things, provided state vehicle inspections. The state required that vehicles meet specified safety requirements but let vehicle owners choose a private enterprise (mostly dealerships and service stations) to do the inspections. These enterprises were licensed and inspected by the state’s Department of Motor Vehicles. Vehicle owners had choice. Mechanics and service station operators had business opportunities, with the job creator being the state. Unhappy customers had recourse, with various avenues of recourse if they were dissatisfied with the service. During those years, a neighboring state had similar safety requirements (for all I know, they could have been identical), but required vehicle owners to visit a state owned and operated inspection facility where, as I was told and read, vehicle owners were served first-come, first-serve, without the opportunity to make appointments and thus sitting in lines for hours (all of that has since changed in that state). In that state, there wasn't the blend between government and private sector control that was found in the Pennsylvania system. Unfortunately, that blend isn’t found in the privatization proposals and projects popping up in the twenty-first century. When I explore the many failures of privatization projects, the lack of that blended control stands out.

It's a different situation when a private-public partnership arises from public involvement in what would otherwise be a private sector project. Those private-public partnerships don’t involve private sector takeovers of public functions. Of course, those sorts of partnerships are disliked by those who prefer the ones that not only reject government involvement in private projects but also want to push government out of public functions. So, something that is a private-public partnership is not necessarily deserving of criticism. It depends on which functions are being shifted.

As I re-read what I wrote in 2023, I recognized that it built on what I had written in those commentaries starting in 2010. I saw the blended public-private control of limited private sector involvement slowly shift to increasing amounts of private control. Worse, that private control did not sit in the hands of thousands of middle-class mechanics and service station operators but in the hands of the oligarchs. The more I re-read what I have written the more I realize that the signs were there, as long as a decade and a half ago, that left unchecked, as it has been, the trend would bring us to where we are now and worse, where we appear to be heading. So yes, when the facts changed, my thinking changed.