It's over. Well, almost over. Taxpayers have until midnight on April 18 to file their 1040s and pay their 2010 income tax.
We survived another tax season, but good grief, the United States Income Tax is hopelessly complicated.
The National Taxpayer Advocate, Nina E. Olsen, issued her annual report to Congress earlier this year. Ms Olsen says that the single most serious problem taxpayers face is "the complexity of the Internal Revenue Code." According to the report, IRS data indicates that individual and business taxpayers spend 6.1 billion hours a year trying to comply with the law. (See the whole report at http://www.irs.gov/advocate/)
According to a National Taxpayers Union position paper, the current paperwork burden generated by the Treasury Department is the equivalent of 3.7 million employees working 40-hour weeks year-round without any vacation. That's more workers than are employed at the five biggest employers among Fortune 500 companies - more than all the workers at Wal-Mart , UPS, McDonald's, IBM, and Citigroup combined.
Ms. Olson's report to Congress also pointed out:
- Over the last 10 years there have been 4,428 changes to the tax code - that's an average of more than one a day. There were 579 changes in 2010.
- The Internal Revenue Code contains about 3.8 million words. In 1955 it was only 718,000.
- The Treasury regulations which interpret the Internal Revenue Code stand about a foot tall (printed on thin paper)
- The CCH Standard Federal Tax Guide, a leading publication for tax professionals, is now in 25 volumes and takes up 9 feet of shelf space.
- Olsen cites the "perverse" results of this complexity: "On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities."
The Internal Revenue Code is full of narrow tax breaks for special interest groups. One of my favorite examples of this is a provision in the 2008 $700 billion financial market rescue (a/k/a bailout). In that legislation, we find a special exemption to eliminate a 39-cent excise tax on wooden archery arrows used by kids. Provisions like these added to tax laws show that Congress simply cannot avoid putting self-serving and trivial items in tax legislation.
Also in that legislation were special narrow tax breaks benefitting Hollywood producers, stock-car racetrack owners, and Virgin Islands rum makers. Don't forget the special income tax averaging for plaintiffs in the Exxon Valdez litigation. And also the 2 year extension of the economic development credit for American Samoa.
What did these tax provisions have to do with the purposes of the 2008 financial markets legislation? Isn't it obvious? They were the "costs" of getting legislators' votes. These special provisions are aimed at getting the votes of naysayers with the promise that if they vote yes this time their pet projects will get in the legislation.
Olsen says "[w]e acknowledge that tax incentives are enacted for legitimate reasons, including to encourage certain types of behavior or to provide benefits in certain circumstances. Nevertheless, when every interest group gets its own tax break, taxpayers worry that others are getting a better deal. Additionally, some taxpayers who could benefit from tax breaks fail to claim them because they do not know they exist."
When the tax system is too complicated, compliance suffers. As Olsen says, no one wants to feel like a "tax chump" - paying more while suspecting that others are taking advantage of loopholes to pay less. Taxpayers who believe they are unfairly paying more than others inevitably will feel more justified in "fudging" to right the perceived wrong.
The IRS says that non-farm sole proprietors report only 43% of their business income and unincorporated farming businesses report only 28 %. Why do these people have so little compunction about cheating on taxes? Olsen suggest that Americans do not understand how their tax dollars are spent and who they benefit and the complexity of the tax code obscures understanding so the typical taxpayers doesn't know what they are paying or why.
It seems as though there is broad-based agreement that the income tax system is broken. Why isn't it being fixed? Most people point to "special interests" as the culprit, and for sure, there are plenty of provisions that benefit narrow groups of taxpayers. But Olsen says the "dirty little secret" is that the largest special interest group is the majority of American Taxpayers who benefit from certain exclusions, deductions and credits. Consider the exclusion form income of health care, health insurance premiums an long terms care insurance. Also consider the exclusion from income of retirement plan contributions, the mortgage interest deduction, reduced tax rates on dividends and long-term capital gains, the earned income tax credit, and so on. These are not from special interests. Understandably, these taxpayers need to be reassured that the loss of their tax breaks will be accompanied by a corresponding reduction in rates.
