Complexity a Boon to the Powerful

If my peers are any indication, it is a given that our government has become significantly larger and more complex over the past century as a result of the increasing complexity of everyday life, but we often fail to note some of the other outcroppings of this fact. Our legal and tax systems, too, become denser with each passing day, and at what cost to ordinary citizens? There are those who would claim there is no cost—we combat this complexity with increased specialization. They miss the point. Only the wealthiest among us are in a position to procure the assistance of all this specialized help. The result? Complex systems such as American law and the tax code tend to favor those in power.

Legal System

The first problem with America’s legal system, without a doubt, is the source of motivation for new legislation: interest groups and lobbyists. The well-established have the resources and every incentive to push for legislation aimed at protecting their own interests. But for the scope of this paper, let us imagine we are only dealing with laws written by an even hand.

Even then, the law would tend to favor the wealthy, because they have access to the best—most expensive—representation. Certainly this is the case with celebrities and corporations. I will try to avoid casting guilt on parties the courts saw fit to acquit, but I suspect any reader can call to mind some celebrity who, though officially acquitted, they believe was guilty. The same can be said of corporations and their executives; or at least it can be said that they get off with relatively light punishments with respect to the financial enormity of many of their crimes. Consider Charles McCall? , a former chairman of McKesson? Corp., who was finally convicted of securities and accounting fraud (involving nearly $9 billion) after ten years and multiple trials. His sentencing is set for next week, so keep an eye out and decide if you think the punishment fits.

Tax System

Our system of taxation, if anything, is worse. The Federal Standard Tax Reporter more than doubled its page count between 1984 and 2003, surpassing the 50,000 mark (1). The result of all this has been the same for some time—only the wealthy can afford the necessary help to understand (read: exploit) the tax system properly. Just two days ago, the Los Angeles Times reported that Frank and Jamie McCourt? , owners of the Dodgers franchise, earned approximately $108 million between 2004 and 2009. Now stop; in your head, estimate what you think they paid in federal and state income tax or what you think they ought to have paid. They didn’t pay any (2). Through the amazing science of carry-forwards and deductions, the McCourts? managed to pay zero tax on $108 million.

If that rubs you the wrong way, consider now Warren Buffett, a figure who needs no introduction. In 2007, he noted publicly that he is taxed on a smaller percentage of his income (17.7%) than his receptionist (30%), and this without trying to avoid paying higher taxes (3). He proceeded to bet a million dollars against the rest of the Forbes 400 if they could show that the same wasn’t true of them and their receptionists. No one showed any interest in the wager (4).

The only way to make these facts sensible is to remember that the most powerful have the best accountants. And when this logic is adopted in a more general context, we’re left with the feeling that the more complex a system, the more it will inevitably tend to favor those with the resources to navigate it effectively.

Feasibility of Change

I am no tax lawyer, accountant or judge, and if they don’t have the answer to these problems, I can certainly make no strong claim to that end either. But I would endeavor at least to think about what possibilities are open.

Individual

This class should be no stranger by now to the idea that, as individuals and future-lawyers, one of our greatest strengths is in our ability to choose our clients. Forfeiture of this strength, though it guarantees no evil, almost inevitably ensures working for the clients who pay best—the McCourts? , McKessons? , McEtc? . And despite the creed of free-market capitalism saying otherwise, pursuing the interests of such individuals is often not in the best interest of society generally. Change from the individual level up, then, depends on the effective use of our particular specialization for the purpose of assisting those that need or deserve assistance rather than those that best compensate us for doing so. Unfortunate as it may be, I am not so idealistic that I think this solution likely on any significant level, as it runs counter to what, for simplicity’s sake, I’ll call “The American Dream.”

Collective

The real answer, I believe, is the one that is most obvious: Simplify. Somehow, despite instinctual and expressed desires to simplify, it never seems to happen. Return to the tax code. Congressmen were (ostensibly) advocating simplification of the tax code as recently as three days ago (5). And yet, even with this persistent pressure, when is the last time you can recall the tax code actually being simplified? Instead, the opposite occurs. The Alternative Minimum Tax (AMT) was introduced in 1969 to target 155 high-income households that managed to avoid taxation through large numbers of exemptions. Now, according to the Congressional Budget Office, “in 2010, if nothing is changed, one in five taxpayers will have AMT liability (6).” Instead of making the tax code easier to understand, Congress has managed to make it even more intricate for up to 20% of taxpayers without even the intent to do so. Unless they also accidentally simplify it, I suppose we’ll have to wait for someone to properly incentivize a simplification movement, because absent even greater change, incentives—money, power—are what get work done.

1.

2. http://www.latimes.com/business/la-fi-hiltzik24-2010feb24,0,5865964.column

3. http://www.washingtonpost.com/wp-dyn/content/article/2007/06/27/AR2007062700097.html?hpid=sec-politics

4. http://www.cnbc.com/id/21708265

5. http://online.wsj.com/article/SB10001424052748704188104575083432091547738.html

6. http://www.cbo.gov/doc.cfm?index=5386&type=0

-- By JohnJeffcott - 26 Feb 2010