Why are taxes so complicated if they really want to be paid?

Question

I'm now 36 years old. In spite of really trying, numerous times, I have never been able to feel as if I even "vaguely" grasp the basic tax concepts for my country (Sweden) or any other for that matter (USA is often mentioned in various contexts), let alone specific tax laws or "loopholes".

There seems to be endless complexity related to this, with so many weird terms sprinkled into any official or even Wikipedia article that I'm just helplessly lost very quickly, even though I want to understand it. If for no other reason than avoid being sent to prison.

Why do governments make tax laws so incredibly difficult to understand if they really want citizens to pay them? Why not simply, clearly state (for example):

1. You must pay us 25% of any income you get from working for somebody else.
2. You must pay us 30% of any capital gains you make from trading stocks or crypto currencies.
3. You must pay us 15% of any profits you make from running your own company.
4. If you fail to tell us the right amounts, you will go to jail.

Why not simply something like that? They have endless webpages that link to each other and each are so vaguely and cryptically written that I truly have no idea what they are talking about.

Why make something so incredibly important so incredibly complicated? Isn't that counterproductive? I can guarantee that there are far less interested people out there who give up much quicker than I, and whether out of spite or by mistake, pay less than they are expected to, simply because they cannot understand what they are saying.

Answer 1

Most governments use taxes not only to collect revenue but also to encourage/discourage certain behaviors and redistribute wealth.

For example, in the US the bottom 50% by adjusted gross income paid about 3% of the total federal income tax. The top 1% paid about 39% of the total federal income tax (2018 figures based on IRS sampled data). A fixed 25% would mean the lowest earners would pay much more income tax while the highest earners would pay much less.

In the US the government decided to incentivize home ownership and retirement savings, and has encouraged/discouraged many other things over time. Each thing adding a fair bit of complexity to the tax code.

Most any argument for a simpler tax code will be met with arguments about how it is unfair in some situations.

In many countries there are a large number of people employed to help people with filing their taxes, to me it feels like wasted overhead, but many might be concerned about how many jobs would be displaced by a very simple tax policy.

Answer 2

You’ve used the words “income”, “profits”, “working”, “capital gains”, ”trading” and “running your own company”. But you’ve not said what you actually mean by them. Define them sufficiently precisely that everyone knows where they stand, without leaving room for loopholes, and without taxing anything you don’t actually want to be taxing. When you’re done with that, you’ll find that you have a thick volume of complicated tax law.

Answer 3

Why make something so incredibly important so incredibly complicated?

Because the tax code is made by politicians for political reasons. Many tax laws are well intended but poorly written. Other tax laws are just made to support a specific political agenda. In any case, the devil is always in the details. For example the definition of what exactly is "profit" is rather complicated. It's "revenue" minus "expense" but is flying first class to Aruba to have business meeting in a posh beach hotel with my wife really an "expense" ?

Isn't that counterproductive?

It sure is. The US tax foundation estimates the tax compliance cost in the US at a whopping 400+ billion dollars. It's just very, very hard to change. The current tax law has grown organically over 100+ years and any change will make someone upset and stage a protest.

I can guarantee that there are far less interested people out there who give up much quicker than I, and whether out of spite or by mistake, pay less than they are expected to, simply because they cannot understand what they are saying.

In general it works the other way around: most "normal" people pay more taxes than they are strictly required to do and most governments are just fine with that.

Many politicians complain about Tax Avoidance. But there is no such thing: there are only badly written tax laws that smart and resourceful people take advantage of while many others lacks the skill or resources to do so.

Answer 4

Why make something so incredibly important so incredibly complicated?

Life is complicated. The economy is complicated. Complicated (human) systems require complicated rules (because humans are always trying to find ways to skirt the rules).

Answer 5

Since OP didn't use a country tag, and referenced both Sweden and the USA, let me answer in terms of the USA. I will also expand a bit on the latter parts of Hilmar's fine answer, with which I agree.

In the USA, individuals file a 1040 form for their annual taxes. This form comes in three varieties:

• 1040-EZ Easy is for those who earn less than $100,000, their income is from earned wages only, they aren't claiming children as dependents, their dividend and interest income is less than $1500, they aren't claiming deductions for IRA contributions, student loan interest, they don't have a home mortgage deduction, don't give to charity.
• 1040-A This is the same as EZ but there's no limit on dividend and interest income; capital losses and gains can be deducted, and you can deduct your IRA contributions and student loan interest if eligible. You can't itemize deductions e.g. from a home mortgage
• 1040 long form lets you do everything you can on Forms 1040 EZ and A. In addition, you can claim more than the standard deduction if eligible, e.g. if you have a home mortgage, give to charity; and if you qualify for credits e.g. the foreign earned income exclusion or adoption credit. You must use 1040 if you earn over $100,000 per year and/or earnings are from other sources besides wages e.g. self-employment.

This is evidence for why the following, from OP's question, isn't true:

I can guarantee that there are far less interested people out there who give up much quicker than I, and whether out of spite or by mistake, pay less than they are expected to, simply because they cannot understand what they are saying.

The government never lets you pay LESS than what is expected. Ignorance of the law is not an excuse for disregarding it. If you pay less than what you owe, and are audited, you will be made to pay what you owe and fines too.

If you figure out what credits and deductions you are legally entitled to, e.g. by filing the correct income tax form, then you will minimize your payments. That is to say, you'll pay less than if you just took the easier approach and didn't spend time on details. (Specifically, if you qualify for a larger, itemized standard deduction and various tax credits, then you will pay less tax with form 1040.)

If you determine that you won't benefit from the 1040 long form, but realize that the 1040-A will save you money because it offers the chance for credits from paying into your IRA, or to deduct all the student loan interest you paid in the past year, then you'll have a simpler tax return. You will also pay less tax than if you chose to file a 1040 EZ form. The 1040 EZ is shortest and easiest of all, but you'll pay more taxes.

*Note that the US switched from 1040 EZ, A, and long form recently to something that has the same effect but with different names, i.e. everyone files the 1040, but based on whether you want to get credits and deductions for which you are eligible, you will fill out various new schedules that weren't necessary before.