Not Too Much Taxes, But Too Many
The problem with the American tax system is not that we pay too much taxes: by the standards of developed nations, we don't. The problem is that we pay too many taxes. Here, for example, is a probably incomplete list of the taxes my as-yet unprofitable startup pays:
1. Federal withholding. This isn't a tax we pay per se, but it is the taxes my employees pay. The IRS has essentially drafted every employer in America as a de-facto tax collector, requiring us to do its dirty work for it.
2. State withholding. And, hey, if the feds can do it, why not Minnesota? This requires a separate set of forms, and a different ID number.
3. Social Security withholding. Another federal tax which we're required to collect on behalf of the federal government, governed by a different set of rules, exemptions, and cutoffs.
4. Medicare withholding. Yet another one, with yet another set of rules. We're up to four taxes we need to pay (and do paperwork for), and we haven't even reached the ones that we actually owe yet.
5. Social Security employer contribution. You thought that Social Security deduction was it, right? Nope, we're required to match the employee's deduction.
6. Medicare employer contribution. Same for this tax. So we've effectively increased our payroll by about 7.5% because of these two hidden payroll taxes.
7. Federal Unemployment Insurance. Another hidden percentage of the payroll. At lease this one lets us use the same Tax ID number as our other federal payroll taxes, unlike...
8. State Unemployment Insurance. I'm not sure what the difference is between the state and federal unemployment taxes, but the Minnesota program must be more generous, since we pay a lot more to it. Minnesota uses a separate Tax ID number for the unemployment insurance. Don't ask me why.
9. Workers' Comp. Technically not a tax, but a legally required insurance program. It works just like a tax: they take a percentage of our total payroll, and we're in big trouble if we don't pay it. Workers' Comp (for those not familiar with it) is a sort of parallel health insurance system. Never mind that we're already paying big bucks for everyone to have health insurance. We're required to buy everyone a separate policy which just covers work-related injuries. In case you think this privately-administered program is less onerous than the state and federal taxes, I should point out that workers' comp also has a mandatory annual audit. Yes, they audit our payroll every year.
Okay, so we're up to nine different taxes, and we've only covered the payroll. What else is in store? Let's take a look....
10. Delaware Franchise Tax. Since we're incorporated in Delaware, we have to pay them a tax for the privilege. Cheaper there than in Minnesota, but that doesn't save us from the....
11. Minnesota S-Corporation Registration Fee. We're an S-corporation, a particular type of company which doesn't directly pay corporate income taxes, but passes the corporate profit or loss to the shareholders. Apparently, Minnesota wants to make sure to get you somehow, so we pay this tax, on top of any taxes the shareholders pay on the corporate profits.
12. Sales Tax. Fortunately, we don't have to collect sales tax on our revenue (though we might in the future), but we still pay it on most of the stuff we buy. And in those cases where we somehow avoid paying sales tax, there's always....
13. Use Tax. Use tax is for those instances when you don't pay sales tax on purchases which would normally be taxable. So, for example, if you buy a DVD from Amazon, in most states, you're supposed to pay "use tax" which is the sales tax you would have paid had Amazon actually collected it. Almost nobody does this, but it is harder to avoid if you're a business, because the states are much more likely to audit businesses for use tax compliance. So we pay use tax. By the way, how does it feel to be a tax cheat?
14. Various telecom taxes. These are included in our bills for local phone service, long distance, and T1 service. Since our business involves a lot of telecommunications, we wind up spending a few hundred bucks a month in telecom taxes (both federal and state), FCC fees, surcharges, and so forth. There are at least three or four separate taxes in here, but I don't even know what they are.
15. Health Insurance taxes. Because we provide health insurance, the state takes a chunk to fund health care programs for those who don't otherwise get it. As with the telecom taxes, I don't even know what they all are, but they're buried in our health care expenses somewhere.
16. Property tax. Our landlord folds this into our rent, but you better believe we pay it. This is the basic mechanism for funding everything not provided at the state or federal level: roads, schools, police, public libraries, etc. In other words, all the government programs we really use on a daily basis.
Okay, that's at least sixteen separate taxes we're paying, with at least four separate tax ID numbers, and a ton of paperwork. If someone would just give me a four-line formula to calculate what we owed each year, I wouldn't mind paying the taxes. That is, after all, the price of having a high standard of living in this country.
But the sheer overwhelming number of different taxes we have to pay imposes some additional burdens:
17. Payroll service. For about $80 per payroll period, we hire an outside vendor to deal with the nightmare of complexity which is our tax system. That's not too bad, given the amount of paperwork they relieve us of, but it adds up over a year, and it's a fee we really shouldn't have to pay. In addition, they make mistakes with some regularity, and often the people working at the payroll service don't understand the various tax laws. So, we have to keep a close eye on them. By the way, this is a very well-known national payroll service, so the mistakes aren't due to going with the lowest bidder.
18. Tax accountants. Every year, we have to pay accountants to prepare our corporate tax return (even though we're an S-corporation and don't directly pay corporate taxes, we still have to file a return). They, too, make mistakes, and seemingly every year we find some technical area where we had been doing things wrong. As with the payroll service, we use a national accounting firm with a good reputation.
19. Legal fees. We also hire lawyers to keep us advised about what we should be doing. They also make mistakes, which is more due to the overwhelming complexity of the tax structure than any inexperience on their part.
All told, our effective tax burden is probably 25% higher because of the professional services we pay to ensure compliance with the laws. Even then, I know we're not in complete compliance with the tax laws, I just don't know where we're making mistakes.
So if Congress really wants to encourage more business activity, my advice is to forget about lowering tax rates, and focus on simplifying the laws. Sadly, tax simplification is one of those things which everyone supports, but nobody ever does.
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