Monday, April 15, 2013

Taxes: Why So Complex? And Can They Be Simplified?

Today is ‘Tax Day’ and millions of Americans will have procrastinated and left preparation to the last minute. This is understandable given that we typically spend 6.1 billion hours and $168 billion complying with the draconian, monstrously long and complicated tax code – via paid tax preparers, accountants or using tax preparation software like Turbo-tax (which wifey and I used for the first time this year, given it was about 70% less than paying the accountant we’d used formerly.)

How complex is the tax code? For a perspective in the simplest reductive form, the original tax 'code' began with the 16th amendment and all of 30 words. Now, the official tax code consumes 4 million words and over 8,000 pages. To give a brief example of the complexity, consider just the taxes to be paid on insurance annuities or pensions therefrom. These are annuities-products that may become available after you’ve paid a set number of years into a life insurance product.

The IRS rules to do with compliance in this area are set out in Publication 939, e.g.

Merely a cursory reading will disclose the complexity – even with worked examples shown! It is little wonder that so many – who may be faced with such - turn to professional tax preparers. However, once one does the basic worksheet, and has the data, Turbo Tax can do in excellent job, including providing the working rationale.

So why are tax laws so complex? Mainly because of umpteen laws congress critters have passed and insinuated into the code, either to try to level the field for fairness, or to incorporate special perks, or to integrate new tax provisions such as occurred under the Bushie tax cuts.  Special corporate interests are also in up to their eyeballs in mucking up and making the tax code so ponderous. As Caroline Baum observed in her Denver Post piece (‘For 168 billion, We Should Get a Better Return’) yesterday:

“Chief Executive officers of some of the largest U.S. corporations join hands to ‘Fix the Debt’ by day, while at night they pay lobbyists lots of money to look after their interests in congress. It seems hypocritical but a CEO is accountable to shareholders.”

In other words, by grafting for lower taxes the same hypocrites who are barking to cut Social Security by day, command their lobbyists to push for easy tax-cut laws (and even write the legislation) at night. With this vast amount of money saved, they can then use it to buy back their own shares to artificially jack up the DOW – luring more small fry investors in – the ones who will most need Social Security later, so they can fleece them with the next correction.

Of course, the simplest alteration to the tax code would be one single flat tax. But even the most menial intelligence would grasp such a step would confer vastly greater benefits on a super- rich guy like Warren Buffet, compared to a WalMart worker. A ten percent tax hit on Buffet is basically pocket change for him, while for a WalMart worker earning only $15,000 a year it would mean 2 months of groceries. Clearly then, at the very least, several flat tax levels or marginal rates would be needed in order to ensure tax fairness.  This is exactly why any demand for progressive tax rates automatically incurs complexity. It is unavoidable if we insist on fairness.

Most modern industrial nations have such levels, but also have fair exemptions or tax credits, instead of umpteen million loopholes, and escape clauses. Examining the U.S. exemptions and credits one can see clear cases where some are surely needed and others need to be junked. For example, petty tax hits on small fry ordinary people for gifts, prizes ought to be nixed. Thus, those folks who some ten years ago were given brand new auto prizes on an Oprah Winfrey show should not have had to pay taxes on the prizes. (A few had to ask Oprah to take their prizes back because they couldn’t afford to pay the taxes! This is absurd!)

I also have a problem with taxing U.S. Nobel Prize winners! No other nation on the face of the Earth does this, and neither should ours. (However, I can see a case for higher taxes on semi-automatic gun owners! At least state taxes, similar to what is now imposed yearly for automobile ownership)

The child tax credit is also suspect. Why, in a nation which is already overcrowded with 315 million people, do we need a child tax credit? One could justify it in the olden frontier days when more people were needed to settle the West, and homesteaders were required. But not now! Indeed, repealing the child tax credit can be rationalized as a back door carbon tax, since each American human leaves an enormous carbon footprint from the instant he’s got his first nappy and sippy cup. Such repeal then is a fair option if Americans refuse to accept an outright carbon tax - which most other industrial nations in Europe have, paid on top of their gasoline costs.

On the other hand, one can sympathize with a childless (not by choice) couple, who can benefit from eggs donated to a fertility clinic. In this case, the woman who donates the eggs to help such a couple should not have her compensation taxed. (As was noted in PARADE yesterday, by an ‘Ask Marilyn’ correspondent) As Marilyn vos Savant put it in the last part of her reply:

“Parents everywhere give their heartfelt thanks to egg donors, and government should make this gesture (no taxes on compensation to donors) to do the same.”

An expression with which I fully concur. The problem then with the U.S. tax code and its complexity is largely one of externally imposed irrationality. There is little rational basis for many existing exemptions or credits e.g. oil depletion tax allowance, child credit), and there is disproportionate irrational (and unfair) basis for other taxes imposed- including on egg donors for childless couples, on Nobel Prize winners, and on small prize, e.g. auto,  winners.

I am convinced that if rational legislators set to work, with rational lobbyists and the IRS, they could come up with a tax code at least half the size of the one we have now, and with perhaps half the complexity.

A final note: The new top rate of 39.6 percent is  historically low; with investment income still taxed at special low rates; and the heirs of multimillion-dollar estates face lower taxes than at almost any time in modern memory. Meanwhile, working people pay disproportionately higher taxes than market speculators as well as rich guys who can put money in trusts, or use charitable deductions.

A number of IRS Taxpayer Advocates have rightly called for legislative sanity in this arena, but don't look for any - which implies simplification- as long as Repukes are holding the House.

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