Let me tell you how it will be
There’s one for you, 19 for me
`Cause I’m the taxman, yeah, I’m the taxman
The Beatles’ George Harrison wrote those lyrics in 1966. Yes, he’s a Brit. But taxes are taxes. And in America, rising tulips can mean only one thing: The taxman cometh.
The cliche is that only death and taxes are non-negotiable. But taxes are endlessly negotiable because so many of their components are arcane and confusing. Equally bad, the rules are like kudzu. They just keep growing.
Only accountants paid by the hours relish the complexity of the tax code. Politicians yammer on and on about simplification. In fact, entire presidential campaigns have been waged on tossing the whole mess out and starting over with a flat-tax–that is, a flat percentage of everyone’s income–with math so simple and straightforward it could fit on a postcard.
Don’t hold your breath.
Still, the Bush administration is about to launch a campaign to simplify the tax code. The charge will be led by Treasury Secretary Paul O’Neill, who has called the code an “abomination.” He’ll get no quarrel here. And yet, in its first 14 months, the Bush team has added to the complexity. Last year’s $1.35 trillion, 10-year tax cut required 441 separate tax code changes.
The economic stimulus act–officially the Job Creation and Worker Assistance Act of 2002–adopted last month requires another 161 changes. Since that bill was also the vessel for numerous technical and clerical corrections to previous tax legislation, the effective dates for tax law changes it mandates range from 1983 to 2009.
These depressing figures come from CCH Inc., based in suburban Riverwoods, a firm as old as the federal income tax–both were born in 1913–that tracks, explains and analyzes tax laws.
There is plenty to track, explain and analyze. When the 16th amendment empowered Congress to collect a tax on income, the first law was a succinct 15 pages. CCH estimates the tax code, regulations and other data needed to interpret the code totaled 400 pages back then.
This year all of that totals 52,310 pages.
The congressional Joint Committee on Taxation says a taxpayer filing the common Form 1040 could be faced with 79 lines, 144 pages of instructions, 11 schedules totaling 443 lines, 19 separate worksheets and the possibility of filing numerous other forms. The 273-page “Your Federal Income Tax” published by the IRS lists 18 other commonly used forms. Some estimates put the cost to Americans of complying with our monstrous tax code at $150 billion. With a “b.”
When asked, two-thirds of Americans say they think the tax code is “too complex” and you just have to wonder if all the rest are tax lawyers.
Lawmakers constantly change the rules and are consistently inconsistent when they do so. To take one example that has caught O’Neill’s attention: He wonders why children are defined five different ways in the tax code. Depending on which credit or exemption a taxpayer is seeking–personal exemption, child credit, childcare tax credit, adoption credit, Earned Income Tax Credit–a “child” is defined as being under the age of 13, 17, 18, 19 or 24 years.
Does it really have to be this complicated?
Up to a point, yes, says Chris Edwards of the Cato Institute, because ambiguity was built into the 16th Amendment. It gave Congress the power to “collect taxes on incomes, from whatever source derived.” So for openers, there’s no consensus on what to tax. Edwards recently wrote that “no simple, efficient and stable measure of income has been found in nine decades.”
Read through all 52,310 pages of code, regs and analysis and you’ll find that some “income” is taxed once, some many times and some is exempt. Take capital gains, basically the amount by which an asset such as stock has appreciated over time. Since capital gains were carved out from ordinary income in 1922, Congress has changed their tax treatment 25 times.
Simplifying all Congress hath wrought won’t be easy. The Joint Committee on Taxation released a study on simplifying the code last year. Even that runs three volumes and 1,324 pages. And every time the politicians tinker, it becomes clear that some people will end up paying less–but others more. It’s like pulling at threads in a tapestry: They’re all interwoven.
But there are ways the politicians could help. They could undo some narrowly targeted tax breaks, a favorite Clinton-era tool. And they could quit gaming us with complicated phase-ins and phase-outs that make it look (wink, wink) like a tax cut will cost less than it really will. Example: The Bush tax cut repeals the estate tax over a decade. But if Congress doesn’t act, in 2011 the estate tax reverts to the get-go. That uncertainty confuses families trying to plan for their, and their descendants’, futures.
News reports in recent weeks suggest that the administration wants to simplify both corporate tax rules (excise, business depreciation, international) and personal ones as well (including breaks based on income, such as education credits). The Earned Income Tax Credit is especially galling: it buries low-income workers, who are ill-equipped to hire tax advisers, in mind-numbing calculations.
Given the amount of time and effort spent trying to define income, many have concluded it would be simpler to get rid of the income-based tax code altogether in favor of a tax based on consumption. How much money you made would no longer matter, how much you spent would. One advantage: A consumption tax would eliminate the current bias against saving and investment.
Whatever route it chooses, Congress and the White House owe the American people (a) a big apology for their wretched excess of the past and (b) a simpler tax code. Given the aggravation tax preparation causes, you’d think members of Congress would see simplification as a way to win the votes of appreciative citizens.
Those 52,310 pages of rules, regs and analysis should constitute a warning that Washington is straining the patience of those it counts on to voluntarily obey the tax system. Even with the complexity, most people try their darnedest to do the right thing. But Americans aren’t fools. There’s a limit and we are dangerously close to it.
