A Bit 'o Random Musings on Politics, Religion, and Anything Else That Passes Through My Crazy Head

Saturday, April 18, 2009

Tax Simplification = Tax Reform?

simplification: to make less complex or complicated; make plainer or easier
reform: the improvement or amendment of what is wrong, corrupt, unsatisfactory, etc

It's been awhile since I actually wrote something about politics. And let's face it, taxes are a political issue. Recent TEA parties have argued that taxes are too high, but the truth is that tax rates have stayed relatively constant over the years. In fact, for all the talk about how "progressive" the tax system is (oh, those poor, poor rich people!), recent data show that tax rates are a lot less progressive than you'd think. People talk about tax simplification and tax reform. In reality, any simplification of the internal revenue code is going to be reform.

According to Time magazine, it takes an average of 37 hours to complete a basic 1040 individual tax return. So, many Americans turn to tax professionals, often paying them way too much money to complete what should be a simple task. The tax code has gone from 31 pages in 1913 to more than 3 million words as of 2004.

So, especially at this time of the year, a lot of people are saying we should simplify the tax system. One good example of this is family credits. Say you have kids - you could then be eligible for the dependent care credit, child tax credit, additional child tax credit, and a larger earned income tax credit - in addition to the exemptions you get. Each of these credits is calculated differently. One idea I read about wants to simplify all these into one "family credit" - one amount to streamline things! The problem is this creates winners and losers. If you only have one kid, you would get a bigger credit under this proposal, but if you have lots of kids, you pay less tax under the current "complicated" system.

This leads me to the dirty secret of the Internal Revenue Code: every complication is in there because of us. Someone has either advocated for a tax break, or someone has done something stupid so that the Treasury Department has to issue a regulation or litigate to prevent it. U.S. taxpayers are responsible for every deduction, credit, exemption, and secret rule. Some decisions about taxation are essentially arbitrary - there's no right or wrong (unless one answer benefits you more, apparently). One example of arbitrariness is "depreciation" - how you expense business equipment. Tax laws arbitrarily give items like furniture a "life" over which you expense the cost of a desk, even if the desk sticks around for 50 years.

Our tax code is a reflection of what behaviors we want to encourage or discourage. So, should teachers have a tax break to buy school supplies? Sure! Should we give people tax breaks to improve energy efficiency? Why not! Should corporations be rewarded for hiring people from economically disadvantaged areas? You betcha! Each of these items may be good things, but they add a layer of complexity to the tax code. This benefits people with enough money and political influence to change the tax laws. One recent article described a 2200% return for companies investing in lobbyists because of a sweet tax break they got in 2004.

Some say that we should get rid of all the special tax breaks and lower the rates - that way the tax system would be simpler, and would bring in the same amount of revenue. The problem with that is human nature - politicians are always going to be meddling with deductions (and we'll ask for them). If we lower the rates and abolish special rules, eventually the rules will be added back in and the system will end up bringing in less revenue, further undermining our fiscal health. Essentially, any effort to streamline the tax system is going to be reform, because it's going to have to take away tax breaks and perks for some people - for example, people with kids, homeowners, or those who give a lot to charity. Some proposals take reform to a whole new level, by wanting to abolish the income tax and replace it with a national sales tax. I think this is highly unlikely. However, I am against it mainly because I feel like it hurts the poor the most. If you click here, there's a good description of the pros and cons (obviously, as an accountant, con reason #5 is very important to me).

P.S. I tried to keep this to five paragraphs, but went over. Sorry, I tend to get nerdily excited when I talk about taxes. I think my next political post will be about the other half of my Democratic "tax and spend" mentality.

1 comment:

  1. It's true. But is there any way to make it easier to fill out the forms without changing the way taxes are assigned? Some way to just explain it simply so that it's not such a headache for non-tax nerds? Probably not, but it would be nice.

    And don't worry about going over five paragraphs--it was more informative that way, and I liked it!