Prelude to Simplification: Why Taxes Are So Complex

PRELUDE TO SIMPLIFICATION: WHY TAXES ARE SO COMPLEX Complexity is built into the legislation process. Tax complexity results from a legislative process that's driven by lobbyists, campaign fundraisers, budget watchers, legislators working in the sunshine and proponents of This creates a tremendous institutional bias toward complexity. Unfortunately, simplication is everyone's third or fourth priority. To change this bias, the American Institute of CPAs has launched a campaign for simplification. This article details how such a complex law has come about, why vested interests increase complexity and what can be done to encourage simplification of the law. WHAT'S WRONG WITH COMPLEXITY The U.S. system is founded on voluntary compliance. Complexity erodes this foundation and reduces revenues. Ultimately, when laws are difficult to understand and comply with, taxpayers lose respect for the system itself. Complexity requires hours of expensive professional talent and mountains of paperwork. In the past, a good adviser could help arrange a client's affairs to minimize the client's burden. Today, a adviser ignorant of complexity can prepare an incorrect return showing a lower than the same return prepared by a competent preparer. And the low odds of being audited make this a successful strategy! Simplification is possible. Given today's deficit-ridden government, any simplification proposals must be revenue neutral--that is, they must not reduce the government's revenue. This means simplification will happen only when taxpayers go against their basic instincts and agree to changes that may result in higher taxes. The first step is to develop a vocal constituency for simplification. The second step is to reform the legislative process. Few simplification proposals will become law and stay simple without changes in the legislative process. TAX EXPENDITURES Tax provisions can be classified as structural or tax expenditures. * Structural provisions are those necessary to implement a on net income. Often, the underlying transactions are extraordinarily complex and require a complex law. However, a complex law can still be logical and coherently structured. In this case, simplification means controlling complexity. * Tax expenditures are subsidies of financial incentives that benefit a particular group of taxpayers. They constitute the single biggest cause of complexity in our income system and they're not needed to implement a on net income. Tax expenditures with broad constituencies include home mortgage interest, charitable deductions, individual retirement accounts, personal and dependent exemptions, the standard deduction and childcare credit. Narrower--but powerful--constituencies support accelerated depreciation, low-income housing credits, statutory oil and gas depletion allowances, parsonage exclusion and handicapped access deductions. A expenditure isn't inherently wrong, provided a complete cost-benefit analysis determines it's the most efficient method for a necessary government intervention in the economy. However, no such analysis currently is performed; and that results in many inefficient expenditures being passed. Unlike spending programs, expenditures are immune from the automatic cuts of the Gramm-Rudman Act. Consequently, there's a built-in bias toward creating * Non-tax-writing congressional committees can further their missions (for example, ensuring better housing or employment) by proposing or supporting And representatives gain the votes of those affected by the programs. * Government agencies looking to add programs outside their limited budgets will favor a expenditure--any expenditure--to fund the programs. …