April is the cruelest month. So proclaimed the poet T.S. Eliot in his masterful work, “The Wasteland.”
April is the cruelest month, breeding
Lilacs out of the dead land, mixing
Memory and desire, stirring
Dull roots with spring rain.
For me, it’s become almost a ritual every April to recall Eliot’s words. But it’s not because of the melancholy passing of one season into the next; it’s because of the grueling, pencil-snapping process of filing my income tax returns. This dull, cruel task grows more burdensome every year—a true wasteland of time, effort and expense.
Millions of small business owners are forced to plunge into a surreal world defined by thousands of pages of Internal Revenue Service tax code. It’s a virtually impenetrable thicket of depreciation allowances, worksheets, tax tables, alternative minimum taxes, deductions, additions, subtractions, exemptions. And, it’s growing more complex every year.
Would if we could, return to a simpler time; let’s say 1955. The Brooklyn Dodgers were contenders for a pennant, tailfins were just sprouting on cars and the average house cost $6,500. Meanwhile, the tax code comprised a mere 409,000 words in roughly 173,000 provisions, according to the Tax Foundation.
Twenty years later, by 1975, the tax code had almost doubled in size to 792,000 words in 395,000 provisions. Over the next ten years, the IRS would add another 300,000 words and 250,000 new provisions. And the process continues right up to the present day. Our tax code now comprises almost 2 million words and almost 1 million provisions, according to the Tax Foundation. Has our society grown that complex? Hardly, but the tax code has taken on a life of its own.
To be fair, our society actually has become more complicated since the 1950s; that surely accounts for some of the growth. But if you are wondering how we got into this mess, look no further than Washington and state capitals around the country. The tax code has become a train wreck as the result of decades of social and economic engineering.
No matter the cause — from stimulating investment in technology to encouraging historic preservation — lawmakers invariably create a tax credit, deduction or some other tax loophole to address the issue. In the process, it generates hundreds if not thousands of pages of new red tape.
Of course, small businesses potentially benefit from dozens, if not hundreds of these provisions. But over the years, the government has increasingly tightened the tax noose on small businesses, according to a recent study by Rafael Efrat, a business and economics professor at California State University, Northridge.
In the 1980s, Congress curtailed or eliminated a range of business expenses, which had the effect of ratcheting up tax bills. The self-employment payroll tax also increased to twice the wage and salary rate.
“In sum, the income tax and the payroll tax changes in the 1980s significantly reduced the relative tax benefits of being self-employed,” the professor noted.
Efrat’s study looked at the role that tax burden plays in small business bankruptcies. And, as it turns out, changes to income and payroll tax laws were only part of the problem. Another significant factor was the burden of compliance. “The cumulative effect of these costs is significant and can be overwhelming,” he wrote.
“In 2004, estimated federal tax compliance costs of business filers was in excess of $100 billion, with an estimate of total hours spent on tax compliance of just under six billion hours. These compliance costs … surged following the tax reform of 1997,” the study explained.
Small business groups are well aware of the problem. They hear it all the time from their members. A recent National Federation of Independent Business poll found that 88 percent of small business owners had to hire a tax professional to prepare their most recent federal tax return.
But many smaller businesses simply can’t afford to hire an accountant. As a result, micro-owners and sole proprietors who could benefit the most from many of the benefits and credits earmarked for them in the tax code don’t take advantage of them.
“Tax rebates, credits, deductions, investments, offsets and more require an intimate knowledge of legalese in the tax code. The record keeping required to take advantage of these ‘tax expenditures’ (Washington, D.C., speak for letting taxpayers keep more of their own money) can be time consuming and hyper-meticulous,” according to Ray Marchiori, a regional advocate for the Small Business Administration in Milwaukee.
For many small business owners the situation is a terrible Catch-22. “The significant compliance costs are not only burdening the small business owners monetarily, but also impose substantial psychic costs,” according to Efrat. To make matters worse, the IRS is stepping up audits of small businesses and considering other provisions to close the so-called “tax gap,” the amount in federal taxes owed versus what the government collects.
In his own study, Efrat found that tax problems were the third most frequently cited problem by the small business owners who had filed for bankruptcy, behind business competition and internal business problems.
So it’s no wonder that April is the cruelest month. Until Congress takes seriously these perennial laments, the tax burden facing small business will continue to be one of the biggest impediments to the nation’s growth and prosperity. Let’s hope this year, Congress finally starts down the road leading us out of this wasteland.