Posted 7:54 PM by steve

Here is why calls - whether they come from Obama or from the tea-partygoers - to 'simplify' the tax code is just a waste of effort (in no particular order):

* Some of the complexity in the tax code arises from needing to define 'income'. For example, while 'wages' might be pretty straightforward, what exactly is 'investment income' and when is it recognized for tax purposes? Is 'interest income' only income to the taxpayer when it is received or is it income when it is earned by the taxpayer? Does 'basis' factor into the calculation of 'capital gains income'... and if so, how does one calculate that amount? Unless we stop using income as the basis for establishing one's tax liability, you aren't going to be able to get rid of the part of the tax code that applies to defining what income is and when it is recognized for tax purposes.

* Likewise, defining 'deductions' accounts for a fair number of pages in the tax code. Ah, you say, we're going to get rid of all deductions, so case closed, right? Not so quick. Are you not going to allow companies to deduct their expenses from their revenue to calculate the income on which they pay taxes? If so, that is hundreds of pages that you can't rid of, as you'll still need rules to define how a company calculates 'costs of good sold' and 'depreciation expense' (how many years? what amount factors into the calculation? what happens when you sell a depreciated asset?).

* And you will never get rid of all personal deductions as Congress will never agree to stop using the tax code to advance their ideological agendas. They'll never eliminate deductions for people who have suffered catastrophic (uninsured) losses nor will they ever get rid of deductions for state income taxes and charitable contributions. And, for example, if you don't get rid of the deduction for charitable contributions, you don't get rid of the pages in the tax code that establish the rules for establishing the amount one gets to take for their charitable contributions. Neither will they get rid of deductions for, to cite but a few, improving your energy efficiency, restoring historical property and for self-employed taxpayers who make contributions to an IRA.

* There will never be agreement to treat all income the same way for tax purposes. Congress will never agree to treat 'capital gains income' the same as salary income. And when you don't get rid of special treatment for capital gains income, you don't get to get rid of the sections of the tax code that address the process one has to go through to calculate their capital gains. Congress will never treat all social security income for all taxpayers the same as they treat salary income for younger workers.

* Just as the majority of the tax burden falls on a small percentage of taxpayers, so too does the complexity of the tax code apply only to a small percentage of taxpayers. Most taxpayers have nothing complicated that they have to deal with and certainly nothing that a $40 tax software program can't handle for them.

* Those that muddle through the tax code do so voluntarily because they feel the money they could save in taxes is worth the time and effort; if they didn't they could, for example, elect to forgo taking deductions for their contributions. Nobody has to rummage through their files to establish the basis for their residence, they do so only because the money they save by not paying taxes on the full sales price is worth the time they put in looking for receipts for the addition they put on the house fifteen years ago.

* And you'll never get rid of the progressive nature of the tax code so you're not going to get rid of the tax tables and rates in favor a single tax rate that all taxpayers use to calculate their tax obligations.

* And finally, there is no consensus as to what aspect of the tax code needs to be simplified. In fact, the only thing everybody agrees on is that the tax code unfairly benefits 'other' people, nobody ever thinks they are the unfair beneficiary of a loophole or favorable tax treatment. Nobody will give up their edge, they'll insist that other people give up theirs. And lacking any consensus, tax reform will go nowhere.