Tax Season and Information

Published by Lex on

Nothing illustrates the problem with information collection more than the annual ritual of the annual income tax return process.

It is a multifaceted problem.

You can start with the rules. The rules are made with multiple purposes in mind. First and foremost is gathering funds for the government to find itself, but there are secondary and tertiary goals as well. The rules and the goals are interesting to look at, but that is another discussion.

I am fascinated by the annual stress inducing ritual that sends people into a strange stressful lather. It is a complete information cluster.  W-2s, 1099s, 1098s, K1s, Schedule As, blah, blah and so on.

Information drawn in from different sources, reported on different forms, and submitted to some central authority for processing it and making sure it all complies with the letter of the law. It is mostly quantitative information, but there is a qualitative element to it as well.

The quantitative side of it is rather straight forward, but the classifications and relative merits of different types of income are largely subjective. The same goes for what qualifies as deductible expenses….

The annual information distribution that begins in January and carries on through the Spring, is a huge activity that delivers so little return on activity. So much motion…So much information.

No doubt, it is a huge industry. Lawyers, accountants and programmers all make work for each other year after year. Politicians fighting proxy battles of fairness over the best way to the tax rich to fund programs to help the average person (whoever that would be).

The information collected from tax returns tells some kind of story about income and wealth. But the story it tells is fraught with bias. The bias and the assumptions of those making the tax law, the bias of those assigned to codify the tax law, those who interpret the tax rules to file tax returns and finally the bias of those who look at tax return data to look for patterns. The data is sliced and diced but in ways that reflect the bias of each of the stakeholders.

Is it an accurate story? Hardly. Does it provide some useful guidance? Probably. Can we do better? I certainly hope so.

The income tax process is a data gathering and reporting exercise that attempts to fairly quantify something called income, but it is much more of an exercise in annual compliance and enforcement.