Complexity Tax: Tax Code is Its Own Tax

USA Today argues that the complexity of the U.S. tax code is itself a form of taxation.

In 1986, President Ronald Reagan signed into law the last significant simplification of the tax code. Since then, succeeding presidents and Congresses have messed it up again with layers of complexity. Anyone who saw this coming could have made killing. A $5,000 investment in the stock of tax-return preparer H&R Block in the fall of 1986 would (with dividends reinvested) be worth more than $170,000 today. But for those not inclined to put their money where their cynicism is, the increasing complexity of the tax code has made for nothing but misery. The code has become so complicated that it is best seen as a tax in itself. Call it the complexity tax.

On top of the tax paid on income and capital gains, we pay a cost – in dollars or in hours – because lawmakers like to accommodate lobbyists seeking deductions, exemptions and credits. Some of the ways the public pays:

  • Help! Help! Sixty-one percent of taxpayers have been driven into the clutches of tax-preparation services, according to the National Taxpayers Union. That’s up from 38% in 1980 and 46% in 1986.
  • Are we done yet? Taxpayers and their accountants will spend an average of 13 hours on their Form 1040s this year, up from nine hours 15 years ago. They will spend almost four hours on 1040EZs, up from one hour in 1990.
  • The cost of compliance. Individuals and companies spend about 6.5 billion hours filing their taxes, according to the Government Accountability Office. Estimates of the cost to the economy run from $125 billion to $140 billion.

What makes all of this anguish and expense more remarkable is that it comes despite the arrival of user-friendly tax preparation software such as Turbo Tax. Even these tools are no match for a monster code.

Of course, taking one’s taxes to the poorly trained seasonal workers at H&R Block is unlikely to be very productive. Indeed, I’ve never understood the rationale for most individuals using a professional to do their taxes, since the hard part is keeping accurate records all year and having them at the ready.

I’ve been using either TurboTax or TaxCut for several years now and have been more-or-less pleased with that method of filing my taxes. (The less part having mostly to do with the aggravating “rebates” they use as a gimmick to advertise low prices.) I’m guessing the average person would be better off with one of these programs than going to H&R Block (which, ironically, owns TaxCut). I could file my taxes in a couple of hours if I had all my records organized properly. Since I never do, it takes much, much longer.

Joseph J. Thorndike weighs in with a contrarian view in today’s NYT.

WITH tax returns due today, we hear the usual complaints about the onerous tax system and the hassle of filing taxes. Certainly the tax code is incredibly complicated, but in fact filing taxes is too easy, not too hard. With paid preparers and sophisticated software, most Americans are protected from grappling with the worst features of the modern tax system. This may seem like a good thing, but it comes at a steep price.

Once upon a time, Americans realized that something beneficial came from the pain of paying taxes. In the 1920’s, Treasury Secretary Andrew Mellon made this case repeatedly. “Nothing,” he told Congress, “brings home to a man the feeling that he personally has an interest in seeing that government revenues are not squandered, but intelligently expended, as the fact that he contributes individually a direct tax, no matter how small, to his government.” In 1955, the commissioner of the Internal Revenue Service, T. Coleman Andrews, went so far as to decree that the agency should stop helping people fill out their tax forms. His reasoning? Americans should be educated, not coddled. It did a citizen good to come face to face with his tax bill.

[…]

By 2002, more than half of all returns came from paid preparers. More recently, software has eased the burden for those determined to go it alone; such programs can reduce thorny tax calculations to a series of simple questions. With each year, Americans have become increasingly insulated from the trauma of figuring out what they have to pay.

So why is this bad? When it comes to taxes, pain can be a good thing. It keeps people vigilant, encouraging them to keep a wary eye on government. That, in turn, exposes problems and encourages reform. Making taxes easy removes an impetus for Americans to force the government to do something about the tax code.

Consider the alternative minimum tax. Congress created the tax in 1969 to ensure that rich Americans don’t take advantage of so many deductions and exemptions that they pay little or no tax. But lawmakers failed to index the tax for inflation. Each year, as incomes rise, more middle-class Americans fall prey to this fiscal monstrosity. In a few years, it will ensnare almost a third of American taxpayers.

In a world without paid preparers and TurboTax, taxpayers would face the tedious process of calculating their taxes twice – once under the regular income tax and once using the cumbersome alternative minimum tax rules. But software does that calculation in the blink of an eye – and for taxpayers who have to pay the tax, tell them how to adjust their withholding so that next year they won’t even notice that they’re paying it.

An interesting point, to be sure. Indeed, I’m reasonably well educated and interested in such things but couldn’t tell you offhand what my effective federal (let alone state) tax rate is. I just put the appropriate numbers into the software and, so long as the resulting refund amount and other things appear reasonable, file electronically.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. USA Today hits at an important point in tax policy. Often, we focus on how tax increases may create economic distortions by causing people to work less — something measured through the labor supply. But that measurement can understate the impact of the tax: while people may retain the same hours of work, they may change their behavior in other ways, like reducing work effort, changing their willingness to take risks — and, of course, paying for more accounting services to figure out the filing system or avoid paying higher taxes or both.

    It’s the old “leaky bucket” at work.

  2. pgl says:

    The tax code is complicated but why? Oh yea – the ultrarich bribe politicians to put in a bunch of gimmicks so they pay less – and we pay more. Bush talks about simplication but does just the opposite. Ahem.

  3. James Joyner says:

    I disagree that “bribery” is a substantial casue of the problem and would note that the exemptions are not just something for the “ultrarich.” All manner of groups–the blind, the elderly, those with children, those with home mortgages, those with gambling losses, etc., etc., etc.–have successfully lobbied for exemptions.

  4. Steve says:

    I’ve been using either TurboTax or TaxCut for several years now and have been more-or-less pleased with that method of filing my taxes. (The less part having mostly to do with the aggravating “rebates” they use as a gimmick to advertise low prices.) I’m guessing the average person would be better off with one of these programs than going to H&R Block (which, ironically, owns TaxCut). I could file my taxes in a couple of hours if I had all my records organized properly. Since I never do, it takes much, much longer.

    Technically this is also a bad thing. The tax code is so complex you have to buy a computer program to have it figure things out for you. That is a cost when you consider it produces nothing really. Taxes (and the spending of taxes) simply redistribute income, and come with their own losses (deadweight loss).

    Tax simplification is probably something long past due, but don’t look for it to come anytime soon as tax lawyers and accountants would then be loosers.

  5. McGehee says:

    USA Today argues that the complexity of the U.S. tax code is itself a form of taxation.

    I for one welcome USA Today aboard a bandwagon I climbed aboard 20 years ago.

  6. Jeff Baker says:

    If you are using TurboTax, it spits out your effective tax rate right on Page 1 of the printed output (above the instructions, as part of the tax summary).