The shroud of the Dark Side has fallen on our current tax system

irs Another tax day is upon us, and many people are probably rushing to get their taxes filed on time. I just finished my own taxes, giving me a moment to ponder just how complex our tax system has become. Maybe most of the population has simple tax returns with one or two W-2 returns and some deductions. However, as a self-employed owner of multiple businesses and real estate, my tax returns have ballooned into a major project, topping out at close to 40 pages this year alone. I hate to think of the cut in productivity across the country when you multiply this effort times the millions of small business owners and their CPA’s during this time of the year.

It is easy to see the logic in some of the legislation that lead us to the current state of chaos. Legislators propose a variety of laws that encourage certain business activities and penalize others. The problem is that there is little or no regard for the practical implications of their decisions when tax time rolls around. President Obama seems to agree in his statements today. Hopefully that will translate into action.

President Obama promised to begin work to simply what he described as "a monstrous tax code" that is "far too complicated for most Americans to understand, but just complicated enough for the insiders who know how to game the system."

I did have a pleasant surprise this year and was a direct beneficiary of Obama’s small business stimulus. As a startup company, we invested a significant amount to get things rolling last year. That generated an operating loss which I could roll back to previous years and gain a tax refund. Sounds great, right? Monetarily it is, but the logistics of filing for the refund with Form 1045 descend into the deep, dark nether regions of the IRS tax code. Not only was my CPA confused by the incomplete documentation, but the IRS representative in the “complex issues department” couldn’t even explain it correctly. It simply doesn’t have to be this difficult.

While easy to fault the IRS, this complexity spills down to the local level in even more insidious ways. Here in Seattle, businesses pay a Business & Occupation Tax (B&O) in addition to our state B&O tax. It is neat and tidy if all of your goods and services are sold in Seattle, but if you venture outside the city limits, you need to break up your sales by city and then pay them a tax based on the square footage of your office, of all things. The forms and methods for calculating this tax make the IRS forms look simple!

There was a day when taxation was much simpler, but that day seems to have passed us by. Hopefully initiatives from the Obama administration are able to make progress here, and hopefully that progress trickles down to the local level. However, that trickle will be slow as we seem to have embraced a culture of legislating taxes to stimulate or cool the economy for each micro-sector. I’m sure small business owners would rejoice if all of this could be simplified so that they can focus on what really matters, which is building their own businesses.