Simple Taxes for Thee, But Not For Me

| Fri Jan. 7, 2011 12:22 PM PST

Via Megan McArdle, Howard Gleckman at TaxVox summarizes the #1 tax problem identified this year by Nina Olsen, the National Taxpayer Advocate at the Internal Revenue Service: complexity.

Olsen estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That equal to a year’s labor by three million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258. Something is very wrong when we have to pay a vendor $258 just to perform the most basic of civic duties.

....More troublingly, all this complexity is driving people to cheat. More than 60 percent of self-employed workers (whose income tax is not withheld) either under-report income or over-report deductions. Olsen attributes at least some of this behavior to taxpayers’ belief that they are paying more than their fair share while others are avoiding tax. Nobody, she says, wants to be a “tax chump.”

I don't disagree with this. I would love to create a simpler tax code, and on the business side I'd be willing to do away with the corporate income tax entirely. As a confirmed bleeding heart liberal, of course, I'd like to do this in return for a code that's more progressive and raises more revenue. But also as a confirmed bleeding heart liberal, I'd like to point out a few things about tax code complexity that our conservative aristocracy doesn't often acknowledge:

  • That $258 number is an average, and most likely includes a whole lot of people paying $29.95 for a copy of TurboTax and a rather smaller number of people paying their Park Avenue accountants $100,000 per year. The average schmo doesn't spend anything like $258 on tax preparation. And keep in mind that a fair number of low-income filers use tax preparers like H&R Block not because they need help, but because they offer "refund anticipation loans" that allow people to get their refund checks faster. (At the cost of a fat fee, of course.)
  • But aside from these kinds of loans, why do low and middle-income filers use any tax preparation at all? Most of them have only wage income and very simple filing requirements. The reason varies, of course, but a lot of it is due to the complexity and auditing requirements associated with the Earned Income Tax Credit. And why is the EITC audited so vigorously? Because Republicans insist on it. We don't want poor people gaming the system for a few hundred extra dollars, after all. This might not be so bad (there really is a certain amount of fraud associated with EITC claims) except that.....
  • The vast bulk of tax avoidance is done by the rich, not the poor. David Cay Johnston reported on some of the most baroque tax avoidance schemes for us last year, and he estimates that in total this costs us something like $300 billion per year. And to make things even worse, Republicans have waged a decade-long war to reduce audits of the rich by the "jackbooted thugs" of the IRS. Just to take the most recent example, Johnston reported in 2006, "The federal government is moving to eliminate the jobs of nearly half of the lawyers at the Internal Revenue Service who audit tax returns of some of the wealthiest Americans, specifically those who are subject to gift and estate taxes when they transfer parts of their fortunes to their children and others."

This post isn't a disagreement that we ought to have a simpler tax code. It's just a reminder that a big part of the reason for that complexity is that rich people want it that way. A simple tax code is hard to game, after all. If we really, truly tried to create a simpler tax code that removed all the common ways that high-income taxpayers fleeced the system, the loudest cries of anguish would come from conservatives, not liberals.

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