Quick wins and slow losses

Filing season

The federal structure that came into being with the birth of the United States was deliberately constrained on multiple dimensions. The new government did not levy income taxes on individuals, and as a result was funded largely through tariffs and excises for the first century or so of its existence.

As the nation matured, finding money for the expanding role of its central government became increasingly tricky. The extensive needs of the Civil War and the costs of the Union Army led to the passage of the very first income tax. It would be temporary, getting repealed a few years after the fighting concluded.

That left the federal government in a secondary role to those of the several states, which continued to be the primary actors.1 Reformers viewed its dependence on consumption taxes as regressive, and the brewing populist discontent characterizing what would be known as the Gilded Age of the late 1800s prompted calls for an income tax on high earners.

There was a hitch, as disputed language in the Constitution’s taxing clause meant the Supreme Court struck down Congress’s first passage of a general income tax. This was ultimately resolved only by amending the Constitution itself, a complicated procedure that by design only rarely succeeds. The Sixteenth Amendment firmly cemented income taxes as the principal national funding source.2

From its inception the income tax code has grown steadily in tandem with the expanded role of the federal government. The original law was limited to less than five percent of the population with graduated rates that only kicked in for the highest earners. The form used for collecting it was three pages long.

In the ensuing decades a succession of diverging policy goals, historical circumstances, special interests, and political visions have caused the code to balloon to its current state, where just describing how it works requires thousands of pages and hundreds of thousands of professionals have found comfortable niches in helping others navigate its complexity.3

Regardless of political persuasion, few look at today’s system as an instance of effective administration. The countless hours wasted by frustrated taxpayers—not to mention the real economic activities distorted in hopes of minimizing the law’s bite—add up to a substantial hidden weight on everyone that’s not adequately seen or valued.

Yet there is little sense that this bloat can be stopped, because each successive rule change has its own internal logic, with constituents advocating for it. The incremental burdens are spread out in diffuse and imperceptible ways, while the beneficiary of that odd loophole or exemption sees a boosted bank balance.

Each discrete policy can be built on sound logic, further adding to the proliferation. Why not use the tax code to encourage certain beneficial investments, or subsidize a desirable behavior, or price in the social costs of some business activity? Yet each independently reasonable decision combines to weigh down the overall system.

Entropy at work

Broader trends can further mask the accumulating impact of choices made in isolation. The 20^th century featured unparalleled prosperity for the United States economy, which rose to a position of global dominance unlike that of any nation in history. With several world-beating industry leaders powering overall growth, the byzantine nature of its tax policy had little obvious consequences.

This isn’t guaranteed to continue. As capital and ideas become more global in the next century the maximum tolerable inefficiency might decrease, in which case the hard work of creating a less burdensome code will grow in importance. At the state and local levels, where policy effects are more apparent and relocating is more feasible, the results of narrow decision making are already driving internal migration.

Organizations can similarly coast through long periods of disinvestment, neglecting necessary but low-visibility processes, slowly burdening infrastructure and staff with inefficiencies that don’t seem to derail their overall trajectory. A crisis can reveal the truth in a moment. The process of rethinking can be painful or even impossible, analogous to jettisoning reams of tax policy and starting over midstream when millions have oriented their lives around the status quo.

For the moment it can make sense to avoid the disruption and expense of major technical upgrades, or forego challenging but needed feedback conversations, or work exclusively on the urgent tasks that must be completed that day. In the background inefficiencies slowly but steadily accumulate.

A prominent recent example comes from the aircraft manufacturer Boeing, currently learning the very hard and extremely expensive way that a corporate culture built around financial engineering is much less viable than one focused on the engineering of actual giant machines that carry people through the sky. The deeper story is not yet fully unpacked and the final bill not tallied, but the losses of two planes are being provisionally traced back to decisions in which technical expertise was subordinated to market demands. Each choice might have been rational by itself, with tragic overall results.4

Forward progress

This tendency to focus on the small at a cost to the large is well-known enough to be captured in old proverbs. Neither the straw that breaks the camel’s back nor the drop that overflows the glass are by themselves unjustified. One lesson is that someone must pay attention to the carrying capacity of the animal or the overall size of the vessel being filled.

Your daily decisions can make sense in the moment while collectively pushing in the wrong direction. A person being rushed to the emergency room can’t point to the single grease-laden meal or skipped workout that contributed to their present health crisis.5 In each moment a bit of indulgence or laziness could be rationalized, but their combination led to their present predicament.

Governments can get away with being thoughtless or irresponsible for even longer, hardening around policies that make life difficult for citizens with little thought for how it undermines the foundations needed for broad flourishing. Tax law is probably not like the proverbial camel being overloaded, and instead of the animal’s back being broken it may just stagger around for a bit. In other areas of administration the collapse resulting from poor decisions can build slowly but arrive quickly.

Breaking this tendency requires a willingness to make decisions that seem suboptimal in the moment, which necessitates courage to stand against constituencies and circumstances that demand something now. Political leaders must be willing to deny plausible requests to contort the tax code. Managers must be willing to inflict unpleasantness on factions that might otherwise pursue their independent objectives. At a personal level, you must be willing to ignore a narrow benefit to understand the wider path you’re on.

What seemingly innocuous decisions are accumulating and creating collective problems? How are you acting to avoid burdening your own and your organization’s long-term health?

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References

The National Constitution Center has extensive commentary on the Sixteenth Amendment and its history.

The National Archives has a copy of the first IRS Form 1040 from 1913.

George Washington University explores the tax preparation industry.

PolitiFact dug into the question of how long the U.S. tax code actually is and found the answer to be ambiguous.

Bloomberg Businessweek looked into Boeing’s culture and its role in the 737 MAX crashes.