Understanding the US Tax Code in Six Minutes
My name is Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter I would take a different approach, have different conclusions, based on different facts and circumstances.
My name is Robert Bonavito, New Jersey forensic accountant. And today, we gonna talk about the tax code. And why am I talking about the tax code? Because when we do valuations and go to court to testify, usually taxes are a pretty important part of our valuations. And we have to have a kind of understanding of the tax code. And this is my view of the tax code.
I mean, if you look at the U.S. tax code, you hear all kinds of problems. It's complex, it's this and that. You know, it doesn't make sense. But essentially the tax code, the purpose of the tax code is to raise taxes for the wider government. And in the United States it costs about, based on my estimates, about 6.5 trillion dollars to run the U.S. economy. So we need to raise 6.5 trillion dollars with federal, state, and local taxes. Real estate taxes, sales taxes, income, all that should equal 6.5 trillion dollars. We don't raise that much with taxes so we actually have to borrow some debt to fill the void there.
But generally if you look at taxes, state and federal combined, it's about 28-30% of GDP, which is comparable to most advanced economies. And if you look at the tax code, you know, it is very hard to understand. But basically 60% of people in the United States don't have to file taxes, 20% have to file taxes equivalent to one page and the remaining 20% have to hire a CPA, you know. And the tax code, there's a lot of...it is not really about taxes even though that's the main purpose of it. It's about social programs and stuff like that, like for example if you want people to buy houses, you give them real estate deductions, you give them mortgage interest deductions. You want people to buy renewable solar panels on their roof, renewable resource, offer them a credit for doing that. You want people to invest in R&D, give them a credit for doing that. If you want people to wear yellow ties, give them a credit to that.
So it's a way for congress and politicians to institute policies that hopefully help everybody. The most successful program that the tax code provides is earned income credit which helps the working poor. It's by far the most successful and the best way to help people who really need help. It's those who are working and aren't making enough money. So that makes the tax code really complicated when you add all that stuff in there, you know. But people talk about flat tax and sales tax. Hey, you know, they don't understand, this is a red herring. When anybody talks of [inaudible 00:03:00] sales tax, national, they don't understand what they're talking about. Because we are a 21st century economy and we need 21st century sales tax.
And, you know, the tax code is not that complex when you take a step back and you actually look at what its doing. I mean, if you look at the complexities of the tax code, a lot of people say it's not really the complexity. What it is is we spend so much time keeping record keeping. And that's why they want to do away with the tax code because they don't like the record keeping. But let's face it, okay? So if you had a national sales tax or a flat tax, it's gonna simplify things. But when you go to your bank for a loan, when you buy a car, when you go to college, what is the first thing they ask for? I want to see a copy of your tax return. Okay? So you're still gonna have to prepare something that is a tax return. It's not called a tax return but you're still going to have to prepare it because you need to keep those records. When you go for a bank loan, they ask for your tax returns.
I mean, the most information you can get from an individual or a corporation is a statement prepared by a CPA. But the second best source is your tax return because everyone files them. We file them annually. If you want to know how much you earned 10 years ago, you can go back in your drawer and figure it out, right? So anytime you hear someone saying about a flat tax, just turn your channel because it doesn't make any sense. They don't understand what they're talking about.
But the thing about the tax code, okay, is that if you look at the tax code and it's complexity, which it is...you know, listen. No one really knows the tax code, it's that complex. And I've been studying this for a while because I'm going to court to testify all the time on tax issues. But as the tax code complexity has gone up, what has happened to the U.S. economy? That's has gone up too, right? And that's no coincidence. It's highly correlated that the complexity of the tax code has helped the U.S. economy, okay? Because there's incentives in the tax code to do things.
So if you do a sales tax or one of these other taxes that these third world countries have done, I mean, we're the United States of America, okay? We are not some third rate country with flat tax or whatever. And they make no sense because the tax code has complexity but it helps the US economy, okay? It does its job, for the most part. And the tax code is complex mainly because we put everything else in there. But there's no choice. You need all those other programs, right?
And the record keeping? You could burn the tax code tomorrow, you still need to keep the same records pretty much, okay? So I just don't understand when people talk about flat tax and the other tax. It's not gonna work and when we go to court to testify on tax issues, yes they're complex and they're hard to understand but...and some of them don't make sense, let's face it. Some of them, they don't make any sense and they contradict each other. But overall, if you want a 21st century tax code, you need complexity. And that's what we have now. My name is Robert Bonavito. If you have any questions, feel free to email me.