Happy Tax Day! I cannot let this day pass without commenting again on our federal tax laws, which are a national disgrace. As long as I can remember, politicians from both parties have been talking about the need to simplify our tax laws, but they have done just the opposite. The federal tax code and the accompanying regulations consist of more than 67,500 pages. Nina Olson, the National Taxpayer Advocate at the Internal Revenue Service, says the tax code contains some 3.7 million words and has more than tripled in length since 1975. Since 2001, according to Ms. Olson, there have been more than 3,250 changes to the tax code, including more than 500 changes last year alone. It is impossible for anyone to understand the tax code or to keep up with the changes to it.
The length and complexity of our tax laws create massive problems for the American people, but our politicians obviously could care less because they are doing nothing to address these problems and instead are constantly making them worse. In a column published in The Wall Street Journal last week, Ms. Olson said her office “estimates that the costs of complying with individual and corporate income tax requirements in 2006 amount to $193 billion—or a staggering 14% of aggregate income tax receipts.” Ms. Olson also says taxpayers and businesses spend about 7.6 billion hours a year—or the equivalent of 3.8 million full-time workers—complying with the filing requirements of the Internal Revenue Service. She reports that about 60% of taxpayers pay someone to prepare their returns for them, and another 22% purchase tax software to help them prepare their returns.
Our current tax system also results—and even encourages—an extensive amount of cheating. The IRS estimates that the country’s “tax gap” is approximately $290 billion per year. The “tax gap” represents the difference between what the IRS actually collects and what the IRS estimates it should have collected. Several nominees to President Obama’s cabinet contributed to the “tax gap” by voluntarily or involuntarily cheating on their taxes. The current Secretary of the Treasury—the Cabinet officer responsible for the IRS—was confirmed by the Senate despite admitting he failed to pay taxes on a portion of his income.
The money spent on compliance plus the amount of the “tax cap” equals almost $500,000,000,000—or roughly a half a trillion dollars. We are talking about serious money that could be used to reduce the enormous tax burden on those who actually pay taxes. Of course, if this money were available, I know the government would find a way to spend it rather than let those who earned it keep it.
Our tax laws are full of complexity and ambiguity. Ms. Olson points out, for example, that there are at least 27 separate provisions designed to encourage people to save for education and retirement. These provisions contain different definitions, income-level thresholds, phase-out ranges and inflation adjustments. In addition, Ms. Olson says about 100 tax benefits are not available to people in higher income brackets, but these “phase out” ranges and amounts are not uniform.
Although we live in a society that frowns on almost any type of discrimination, our tax laws are full of provisions specifically designed to discriminate in favor of one group of taxpayers and against another group of taxpayers. A taxpayer who owns his own home, for example, gets to deduct the interest paid on his or her mortgage whereas a taxpayer who cannot afford to own a home, or who does not wish to own a home, does not get a corresponding tax break for the rent he or she pays to lease a home. Another example relates to health insurance. A taxpayer who receives health insurance as a benefit of employment generally does not have to pay taxes on the value of the health insurance benefit. On the other hand, taxpayers who are unemployed or retired or do not have employer-provided health insurance are required to pay for their own health insurance with after-tax dollars.
There is a simple reason why our tax laws are so complicated. Politicians have tremendous power over our lives because of their ability to make and change the tax laws. Politicians use the tax laws as a tool to reward their favorite constituents by giving them special tax breaks. The favorite constituents are usually those who make the largest contributions to the politicians. It is legalized bribery. A lobbyist for a special interest group gives money to a politician who in turn sponsors legislation to give tax breaks to the interest group. Politicians also use the tax laws to punish groups of taxpayers who have not supported them. In short, the tax laws give politicians the opportunity to reward their friends and punish their enemies.
It should be obvious to everyone that our existing tax laws need to be abolished in their entirety, and we need to start all over with a new simplified and much fairer tax system. This is very unlikely to happen, however, because members of Congress would lose too much power under a simplified tax system.
Why do the voters who elect our politicians continue to tolerate our existing tax laws? In my opinion, there are two reasons. First, almost half of the voters don’t pay any federal income taxes, so they simply don’t care. The federal income tax laws don’t affect them. Second, the voters who are affected by the complexity of our existing tax laws, including me, are simply too passive. We sit back and complain, but we do not demand change. There is some hope voters are beginning to demand change, as evidenced by the taxpayer “tea parties” being held throughout the country today. The focus of the tea parties will be on high taxes and out-of-control government spending rather than on the complexity of the tax laws. In my view, it’s a package deal. We need to lower taxes, lower government spending, and at the same time simplify the tax laws. Today’s tea parties are an encouraging development, but it will take a lot more of these public displays before politicians begin to take notice.
In closing, in honor of tax day, I would like to share a poem that several friends have sent to me on different occasions. I don’t know who wrote the poem, but whoever did has a good understanding of government tax policies.
Tax his land, tax his bed, tax the table at which he's fed.
Tax his tractor, tax his mule, teach him taxes are the rule.
Tax his work, tax his pay, he works for peanuts anyway.
Tax his cow, tax his goat, tax his pants, tax his coat.
Tax his ties, tax his shirt, tax his work, tax his dirt.
Tax his tobacco, tax his drink, tax him if he tries to think.
Tax his cigars, tax his beer, and if he cries tax his tears.
Tax his car, tax his gas, find other ways to tax his ……
Tax all he has, then let him know that you won't be done till he has no dough.
When he screams and hollers, then tax him some more; tax him till he's good and sore.
Then tax his coffin, tax his grave, tax the sod in which he's laid.
Put these words upon his tomb, taxes drove me to my doom.
When he's gone, do not relax, it’s time to apply the inheritance tax.
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