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Nobody understands the income tax

September 11, 2008

That’s what Albert Einstein is reputed to have said, tho I’ve never found it documented.  He might have meant that nobody understands the logic of a tax system that penalizes productivity and “put[s] a premium upon unscrupulousness and a tax upon conscience.” More likely he meant that no one understands how to calculate it.  A recent prominent example could be Charles Rangel, who maybe really didn’t understand that he had to pay taxes on the income from renting his Dominican villa.

But today’s a twofer, because we also have a report that “[s]ome of the country’s biggest investment banks and brokerage firms…marketed allegedly abusive transactions that helped foreign hedge-fund investors avoid billions of dollars in U. S. taxes…”  The big news isn’t that they cheated, but that they got caught. I bet they’ll be a lot more careful in the future.

The income tax is inherently difficult to administer.  Many very smart people spend their working hours figuring out ways to avoid taxes.  Other smart people spend their working hours figuring out how to eliminate the ways discovered by the first group of smart people. (Later those in the second group join the first group, whose work is more lucrative.)

Meanwhile, we ordinary taxpayers have to deal with more and more complexities, most inserted by the second group in a futile attempt to stop the first group.

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