The Psychology of Risk and Taxes

Abstract

M y accountant told me about a client who came to him following a very profitable real estate transaction. Congratulations, said the accountant, made a million dollars. Thank you very much, said the client sarcastically, made a million and a half dollars before I stepped into your office. This client, like many people, sees her advisor as a messenger from the US. Internal Revenue Service (IRS). It is as if financial advisors had the power to banish taxes and deliver high returns without risk. Taxes are the price that we pay for a civilized society, said U.S. Chief Justice Oliver Wendell Holmes. Well, yes. We know that we have to pay taxes, but why do we have to pay so much? The search for tax shelters is long standing. The title of an article in The World's Work magazine of May 1914 is Of Buying Stocks to Dodge Taxes. It tells the sad story of a clergyman searching for tax-free returns who ended with no returns at all. The article states, Doubtless the time will come when all the states will recognize the necessity of working out, along sensible and scientific lines, the problem of the taxation of investment securities. Keep on wishing. We will never work out taxes along sensible and scientific lines. There is something impossible about taxes. It is not only that we have taxes but that we have many kinds of taxes: income taxes, sales taxes, property taxes, and more. Why so many kinds? Ask the tax authorities, and they will tell you the reason is that people cheat on their taxes. We have so many kinds of taxes, they say, for the same reason we have so many tollbooths on roads: Drivers are able to evade some tollbooths, but they cannot evade them all. Ask taxpayers the same question, and they will tell you that they are good, patriotic citizens. It is the