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WHY DO PEOPLE HIRE TAX HELP?

August 05, 2006

Kyle just took a couple of days off; now he's back and he's on fire - he even has a rare tax post.

Kyle saw my link to a Tax Foundation piece saying that Americans spend $265 billion annually complying with the tax code. He wonders if that reflects badly on our civic-mindedness:

At what point did it become socially acceptable to hire professionals to make sure you're making the minimum-possible contribution to that fund?

Sure, saving money is a good reason to have hire a tax professional, or any other kind. Hiring a tax professional can save you money on your return, and if spending $300 on a tax professional saves you $1,000 in taxes, most people would consider that a good investment rather than a mark of poor citizenship. But that's not the only reason people hire a tax pro.

Sometimes it just makes for the best use of your time. If it would take you 12 hours to do your return, but the tax pro can give you 12 hours of your life for the price of a return, that's not a bad deal. For the same reason, many folks will take a car to Jiffy Lube. It's not that they can't change their own oil, and cheaper, but Jiffy Lube will do it faster with less mess and hassle (like getting rid of the used oil).

The urge to outsource tax compliance is especially urgent for a business. It's hard enough to please your custormers; let somebody else keep the taxman happy. If you run a business in multiple states, unless you are very large it's much cheaper to outsource your tax compliance because of the expense of staff and software.

Of course, many people just fear the IRS. It's not that they're trying to chisel their obligation down; they just want some assurance that they won't make a misstep and go to jail. Such fears are overblown, but a lot of folks have them.

Finally, keep in mind what a complex tax code is all about. Enacting a zillion incentives and tax preferences into the law is really a means of outsourcing social and economic policy. A complex tax code in theory fine-tunes behavior into favored channels. Give to charity, but not too much, and more to some charities than to others. Buy municipal bonds, but not too many. Buy a house, but not too big of a house. You get the idea.

To the extent that the tax law is a policy tool, the tax professional inevitably becomes a sort of free-lance bureaucrat, helping to implement the will of Congress. That's not a role we prize, and that's not how we like to think of ourselves, but if the tax law is a policy tool, it's logically inescapable. This means much of the cost of tax compliance is simply a cost of implementing legislation that ends up being paid by the taxed.

If you want to cut the cost of tax compliance, don't ask so much of the tax law. If tax law were used to merely raise revenue, rather than as the Swiss Army Knife of public policy, people would spend a lot less to comply with it.

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