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Why Do We Have Complicated Tax Systems?

MEDIA / Articles / 2015 / Why Do We Have Complicated Tax Systems?
The world suffers from complicated tax systems. Even trained professionals struggle in reading, learning, interpreting and applying the rules correctly.
One recent example comes from the Dutch “Consumentenbond” (consumer union).
This is an independent non-profit organisation protecting the rights of regular consumers. Thirty qualified tax advisers were requested to fill in and file an income tax return. Only 53% succeeded to do so without any mistake. The incorrectly filled forms contained a wide range of errors. This illustrates the complexity of the tax Dutch law.

Let us look across the pond…
Because also in the US, the number of deductions, credits and exemptions is becoming enormous. Almost all Americans need to hire a professional or at least purchase accounting software to satisfy the tax man. Last year the unnatural complexity was something that even the IRS chief himself criticised. According to him, there are simply too many tax laws and they are too complex. This reduces effectiveness in collecting taxes. The old joke that the army of tax officers is six times larger than the US army in Iraq is ever so valid.
In the UK, the situation is not better. A recent parliamentary study showed that the average number of pages of valid tax laws increased from 17 in 1959 to 98 in 2009.

How Should We Deal With These Complicated Tax Systems?

One solution to the problem would be to simply cut all the exceptions, scales and different rates and to introduce a flat tax. Although, “introducing” is not the correct word as flat tax has been here for a long time already. It is the progressive income tax that is relatively new.
As it is often the case with economic “developments” and temporary features, the idea of taxing one’s income was born in the war times. In earlier days, there was mainly the land and residential property tax and excise tax and duties. Then in 1799, the United Kingdom introduced an income tax and increased it to 2.9% during the Napoleonic wars, to cancel it again in 1816. In the US, it was introduced, again for war financing purposes, in 1864-1872. Similarly in Germany, The Netherlands, Sweden, Canada, Australia, Japan, New Zealand etc., always as a flat tax or a progressive tax with very low rate. In the Austro-Hungarian Empire, the highest rate was 3.88% and the system was extremely easy with almost no deductions or exceptions. Why? Because the Emperor knew that every baker had to understand it and file his tax return.
The end of simplicity of tax laws came slowly around World War I. The United States introduced a permanent income tax in 1913, with two rates: 1% and 7%. It was a tax hitting only the upper 0.5% of inhabitants. Already by 1921, the tax rate increased to alarming 73% when the president dropped it to 25%. (Here the Laffer curve showed its magic: by 1929, the state budget revenue increased by 61% at almost no inflation).
World War II brought a further increase in tax rates to levels paralleling confiscation. These extremely high tax rates persisted even after the war. During the fifties, the marginal tax rate on personal income in the US was 91%. Of course the richest lobbied against it and gradually a number of loopholes and exemptions were created.

Lowering Taxes And Simplifying Complicated Tax Systems Increases State Revenues

But in 1963, President Kennedy cut taxes to “only” 70%. The state budget revenues increased.
And the same thing happened in the 80s: the “Warmonger” Ronald Reagan had reduced the tax rate to 28%, a level more appropriate for the peaceful conditions. No revenue losses were reported.
Hitler’s (national) socialist Germany had introduced a progressive income tax up to a rate of 95%. Reducing the marginal tax rates was one of the stimulants of the German economic miracle in the 50s.
In the UK, the extremely high tax rates from the war years lasted until the reign of Margaret Thatcher. Thatcher kept gradually and consistently decreasing the initial level of 83% to 40%, a rate that lasts until today. However, it is still well above the pre-war levels.
In many other economies the tax system is still strongly influenced by the World Wars: it features high marginal tax rate and progressive structure and huge complexity of tax laws with many loopholes and exceptions.
Progressive taxes and the complicated tax systems in Western countries do not prevail because of their advantages, but purely because of historical inertia.
The “introduction” of a flat tax decades after the World War II would simply mean a return to normal conditions.
And we would all be better off.
Luckily, for those with an international mindset, there are ways to reduce your tax burden. Read the About Freemont Group page to discover how we can assist you to legally reduce your tax and subsequent administrative burden.
You might also be interested in the following article: Weird Taxes Worldwide.
In The Ease Of Paying Taxes – Keep It Simple Stupid we explore (more) difficulties that entrepreneurs face in the modern business world.
Learn how the different Tax Avoidance Strategies Are Under Attack (A Big Mistake).

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