This time of the year brings Vol basketball, National Signing Day, snowless school holidays, and prayers for warmer weather.
What a hopeful season until the stream of mail stamped "Tax Documents Enclosed" begins to arrive and we are promptly reminded that the fun is over and it is now "Tax Time in Tennessee!"
Only during tax season do otherwise productive persons spend their evenings and weekends searching for misplaced receipts, trying to make sense of their 1099s, 1098s, W-2s and K-1s, and deciphering various tax forms and instructions. More than once I have been asked, "How in the heck did our tax system get so complicated?"
The system was not always this complicated. When enacted in 1913, the income tax law was only 27 pages, whereas, today's law and regulations comprise almost 12,000 pages -- about seven times longer than the King James Bible.
The individual tax form 1040 was one page long, tax rates ranged from 1 percent to 7 percent, and less than 1 percent of American families paid any income tax. Interestingly, the public and press complained bitterly about the income tax's complexity and even the New York Times asked in 1920, "Why can't we have a simpler method?"
In its early years, the sole purpose of the income tax was to fund government spending. Beginning as early as the 1940s and accelerating in the 1980s, tax policy became less focused on balancing the budget and increasingly used to effect economic and social policy. Rewards, penalties, and incentives took a front seat to fiscal discipline as Congress expanded the number of targeted tax credits, deductions, and deferrals to favored groups and activities.
The result of this shift in policy has resulted in both an increase in tax complexity as well as financial and societal costs. An IRS study shows that almost 170 million individual tax returns were filed in 2012, with each return requiring an average of eight hours and a cost of $120 to prepare. This translates into a total compliance cost to individual taxpayers of more than $20 billion and 1.35 billion hours.
More fundamentally, tax complexity creates suspicion and distrust among taxpayers about their government. The current tax regime breeds public cynicism of Congress and furthers suspicion that the tax laws are written by and for the benefit of the wealthy.
When Congress wants more revenue, its options are straightforward: Increase tax rates and/or eliminate deductions and income deferrals. Because either approach has political risks, Congress has opted for a strategy of intentional confusion by raising revenues through deduction phaseouts, alternative minimum taxes, and expense limitations that are difficult even for experienced tax professionals to understand.
This strategy is used successfully by Congress to raise taxes without raising tax rates or repealing deductions. As noted by the former IRS Taxpayer Advocate, "Complexity matters because people don't know why they are getting the results they are getting."
What a hopeful season until the stream of mail stamped "Tax Documents Enclosed" begins to arrive and we are promptly reminded that the fun is over and it is now "Tax Time in Tennessee!"
Only during tax season do otherwise productive persons spend their evenings and weekends searching for misplaced receipts, trying to make sense of their 1099s, 1098s, W-2s and K-1s, and deciphering various tax forms and instructions. More than once I have been asked, "How in the heck did our tax system get so complicated?"
The system was not always this complicated. When enacted in 1913, the income tax law was only 27 pages, whereas, today's law and regulations comprise almost 12,000 pages -- about seven times longer than the King James Bible.
The individual tax form 1040 was one page long, tax rates ranged from 1 percent to 7 percent, and less than 1 percent of American families paid any income tax. Interestingly, the public and press complained bitterly about the income tax's complexity and even the New York Times asked in 1920, "Why can't we have a simpler method?"
In its early years, the sole purpose of the income tax was to fund government spending. Beginning as early as the 1940s and accelerating in the 1980s, tax policy became less focused on balancing the budget and increasingly used to effect economic and social policy. Rewards, penalties, and incentives took a front seat to fiscal discipline as Congress expanded the number of targeted tax credits, deductions, and deferrals to favored groups and activities.
The result of this shift in policy has resulted in both an increase in tax complexity as well as financial and societal costs. An IRS study shows that almost 170 million individual tax returns were filed in 2012, with each return requiring an average of eight hours and a cost of $120 to prepare. This translates into a total compliance cost to individual taxpayers of more than $20 billion and 1.35 billion hours.
More fundamentally, tax complexity creates suspicion and distrust among taxpayers about their government. The current tax regime breeds public cynicism of Congress and furthers suspicion that the tax laws are written by and for the benefit of the wealthy.
When Congress wants more revenue, its options are straightforward: Increase tax rates and/or eliminate deductions and income deferrals. Because either approach has political risks, Congress has opted for a strategy of intentional confusion by raising revenues through deduction phaseouts, alternative minimum taxes, and expense limitations that are difficult even for experienced tax professionals to understand.
This strategy is used successfully by Congress to raise taxes without raising tax rates or repealing deductions. As noted by the former IRS Taxpayer Advocate, "Complexity matters because people don't know why they are getting the results they are getting."
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