Complex Inferiority

Townhall.com ^ | April 13, 2011 | Jacob Sullum

[Kaslin]

This year, for the first time in more than a decade, I ventured outside the reassuring realm of TurboTax while preparing my return, looking for a late-arriving form at the IRS website. It's scary out there.

Staring at bewildering forms and instructions, I flashed back to the days when I did my taxes by hand, based on my uncertain understanding of what was required, and hoped for the best -- "the best" being a future free of audits, interest on back taxes, liens, fines and prison. Although clever software has helped shield me from the infuriating, nerve-wracking complexity that the Taxpayer Advocate Service identifies as "the most serious problem facing taxpayers," it has not changed the underlying reality.

The federal tax code, which in 1913 could be published as a single 400-page book, today occupies some 72,000 pages. In the last 10 years alone, reports National Taxpayer Advocate Nina Olson (your designated friend at the IRS), "there have been approximately 4,428 changes to the tax code." The instructions for filling out Form 1040, which took up two pages 75 years ago, are 179 pages long this year.

No wonder that nine out of 10 taxpayers use software or professional preparers to do their taxes. Olson estimates that the process consumes 6.1 billion hours and costs $163 billion a year. "If tax compliance were an industry," she writes, "it would be one of the largest in the United States."

And what do we get for all this effort? Well, the federal government gets about $1.5 trillion in revenue (meaning that Americans pay 11 cents in compliance costs for every dollar they surrender). At the same time, according to the Joint Committee on Taxation, the government forgoes $1.1 trillion in credits and deductions that reduce people's tax bills.

The enormous magnitude of these "tax expenditures," the main factor driving the tax code's mind-boggling complexity, represents an enormous opportunity for reform. In December, the president's fiscal commission estimated that eliminating all credits and deductions would make it possible to reduce the top individual and corporate rates, both currently 35 percent, to 23 percent and 26 percent, respectively, even while setting aside $80 billion a year for deficit reduction.

Tellingly, the commission immediately retreated from the idea of zeroing out tax expenditures, saying, "The new tax code must include" child credits, the earned income tax credit, the exemption for employer-provided medical coverage, and the deductions for mortgage interest, charitable contributions and retirement savings. This list includes some of the biggest tax preferences, which not only complicate the code but distort the economy.

The mortgage interest deduction, for instance, contributed to the recently burst housing bubble by driving up the cost of homes, benefiting builders, real estate agents and homeowners at the expense of renters. The policy of not counting employer-provided health insurance as income feeds medical inflation by cutting off price signals to consumers. The deduction for state and local taxes (as well as the one for interest on municipal bonds) encourages state and local governments to spend more than they otherwise would.

Such preferences nevertheless remain highly popular, since their benefits are more obvious and immediate than the benefits of lower rates. "The dirty little secret is that the largest special interests are us -- the vast majority of U.S. taxpayers," Olson writes. "We cannot pretend that broadening the tax base means eliminating someone else's tax break while preserving our own."

Here is another pretense that stands in the way of a simpler, fairer, more efficient tax code: the idea that politicians can improve our decisions by using tax preferences to encourage officially approved behavior, whether it's giving to charity, going to college, adopting children, investing in research, converting corn into fuel, or buying a house, a hybrid car or a health insurance policy. It's bad enough that the government forcibly extracts a share of our income -- it should not presume to direct the spending of the rest.

[bopdowah]

When the IRS Commisioner himself needs help doing his taxes, you know there’s something inherently wrong with the system.

Instead of raising revenue to fund the essential costs of government, our tax system is used for “progressive” social engineering and income redistribution. As originally conceived, our “progressive” tax system was orinially designed to prevents taxes from falling too heavily on low-income folks just trying to survive. This is also good politics, because today, we know that just less than half of taxpayers, including illegal aliens, are freeloaders who pay nothing or next to nothing, while the richest 3-5% pay 40% of all taxes. Presumably, the free-loaders will vote Democrat to continue their freebies, which is why Democrats want more illegals and more welfare.

It’s a wonder our industry can survive at all under these kinds of headwinds. Like Rush Limbaugh said recently, “Democrats have their jackboot on the neck of the Golden Goose, and he’s down to his last breath.”

Personally, I think we have it all backwards. Instead of sending the biggest chunk of taxes to DC, we should sent the biggest portion to our city, then a smaller portion to our Statehouse, THEN a smaller portion to DC. This would eliminate States competing for Federal funds. I think taxpayers should also be extended the courtesy of a receipt from each level of government, showing exactly what we taxpayers are getting for our hard-earned money.

I will get off my soapbox now...