Page 249 - The Principle of Economics

CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 253
IN THE NEWS
Small Business and the Tax Laws
PEOPLE RUNNING SMALL BUSINESSES ARE most aware of the administrative bur- den of the tax system. Small firms must comply with many of the same laws as large ones. Yet, because of their size, compliance can take a much larger frac- tion of their revenue. According to one study, the administrative burden is ten times larger for small firms than for large firms. The following article de- scribes some of these costs.
Obeying the Tax Laws: Small Business’s Burden
BY ROBERT D. HERSHEY, JR.
In the grand scheme of a federal system that collects more than $1 trillion a year, Dante’s Restaurant, Inc., a modest three-city chain in Pennsylvania, counts for little.
But to people like Lewis Kamin, Dante’s controller, the Internal Revenue Code is a year-round headache. There are the biweekly remittances of Social Security and withheld income tax, quar- terly reports of payroll and unem- ployment taxes, quarterly estimated corporate income taxes, and, of course, the maintaining of various records,
including tips, W-4s for withholding, and I-9 citizenship forms.
All this doesn’t count the ubiquitous state and local levies that in Dante’s case are complicated because liquor- license considerations mean each of its ten restaurants must be separately incorporated.
“There is a lot to watch, a lot to worry about,” Mr. Kamin grumbled. . . .
This is the real-world side of Ameri- can taxation, the federal chunk of which is a system based on a monumentally complex set of laws and regulations that was just one-third its current size when Jimmy Carter called it “a disgrace to the human race.”
The code is administered by a 115,000-member Internal Revenue Ser- vice army with a $7 billion budget. But that amount is dwarfed by what taxpay- ers themselves spend on meeting their obligations.
Estimates of what it costs American businesses to comply with federal tax law reach into the hundreds of billions of dollars a year. . . . Big companies are un- der almost continuous audit. The 1992 return for one giant company ran to 21,000 pages and 30 volumes. But the heaviest burden by far falls on small business.
In fact, according to Arthur P. Hall, a senior fellow at The Tax Foundation, the local hardware store, delicatessen, or gas station with assets of less than $1 million—a category embracing 90 per- cent of the nation’s corporations— spends $390 for each $100 it sends to Washington. Put another way, the gov- ernment got just $4.1 billion from these
businesses in 1990, compared with the $15.9 billion they spent producing the basic corporate forms, the 1120 and 1120S.
“What this means is that the cor- porate income tax is a very inefficient revenue source for the federal govern- ment,” Mr. Hall said. . . .
Although complaints about the tax system are often aimed at the I.R.S., businesspeople and policymakers gener- ally contend that the real fault lies with Congress and its frequent, often well- intentioned tinkering with the law. The resulting complexity is taking an ever- mounting toll on respect for the system, and thereby undermines the willingness of even the best-intentioned taxpayer to figure out what he or she should pay. . . .
Since 1981, Washington has put ten major tax laws on the books, gener- ating changes whose cumulative effect “is pretty staggering for the small busi- nessperson,” said Edward Koos, a tax- policy lawyer at the Small Business Administration.
Harold Apolinsky of the Small Busi- ness Council says 9,371 code sections have been amended since 1981, a total that owes much to the lobbying and campaign contributions of the powerful. “It appears to me that small business just has no clout,” Mr. Apolinsky said. “Big business tolerates it,” he added, referring to the resulting complexity. “Small business really can’t.”
SOURCE: The New York Times, January 30, 1994, Business Section, p. 4.
For example, suppose that the government taxes 20 percent of the first $50,000 of income and 50 percent of all income above $50,000. Under this tax, a person who makes $60,000 pays a tax of $15,000. (The tax equals 0.20 􏰀 $50,000 plus 0.50 􏰀 $10,000.) For this person, the average tax rate is $15,000/$60,000, or 25 percent. But