Simplifying Tax Code Can Get Complicated

Everyone agrees that taxes are too complicated; the tax bite itself is only the coup de grace for an already weakened animal. “I can’t even find my way down the form any more,” groans a contractor’s wife who keeps the company books. “I never noticed when the preparer made a mistake, and depreciated and capitalized something at the same time.”

Happily, people in high places want to change the situation. There’s a “Fair Tax” and a “FAST Tax,” a Regan plan and a Reagan promise to reform our tax system for “fairness, simplicity and growth.” But when it comes to taxes, there’s also enough self-interest to stymie the whole movement.

Certainly it seems time for major reform. “Law library shelves groan,” wrote Rep. Richard A. Gephardt (D-Mo.), co-author of the “Fair Tax” plan, “beneath 2,000 pages of (tax) code and more than 10,000 pages of supporting documents.” Each Congress has, according to its visions, added new rules, producing a system, wrote IRS Commissioner Roscoe Egger, “piled high with patchwork complexities.”

Increasing Cynicism

In 1983, 57.3% of those using form 1040 needed tax preparers, and even 24.4% of those using the simpler 1040A, itself now four pages long. According to the Wall Street Journal, even past IRS commissioners Mortimer Caplin and Randolph Thrower hire help, as does former congressional tax king Wilbur Mills, the retired chairman of the House Ways and Means committee.

Both concepts and application are confusing, says the contractor’s wife, “given income averaging, depreciation, capital loss to carry forward or back (I forget which).” “I’m afraid I’d miss some little thing,” says a New York lawyer who no longer does his own taxes. “I remember having trouble with alternative minimum tax; I don’t think it actually affected me, but I was never sure.”

For some people, taxes are “a hobby,” says a psychologist who’s “continually trying to see the loopholes to lower the tax bite.” Others resent time and effort spent juggling loopholes. Still others, whose taxes are straightforward, resent the fact that juggling helps richer people pay less.

One result, says Egger, is “increasing public cynicism about taxes,” and a lot of juggling, even downright cheating. The system is thus unfair to the country itself, which lost $90 billion to which it was entitled in 1981 (the most recent calculation from the IRS).

Hence the simplification plans. The most popular--from the Treasury Department and Congress-- all ax what Gephardt calls “big chunks of the code,” reducing basic tax rates to make up for removing so many deductions; most citizens are therefore expected to pay the same or less than they do now. The plans also retain to some degree a few (not the same few) deductions of widest possible appeal and use--personal exemptions, or some mortgage interest deduction for primary residence, or IRAs, or (in two plans) deductions for state and local income or property tax.

In the interests of equity, whole categories of investment benefits went out, from entertainment expenses (one plan) to preferential treatment of capital gains and full interest deductions for investment property and second homes. Out also went many “industry-specific” favors, from expensing of hard mineral exploration and development costs to an exclusion relating to the Merchant Marine Capital Construction Fund--things important only to the few who know what they are.

Equity, however, is in the eye of the observer, and each of those deletions gored someone’s ox. Lobbyists--not paid to take the long view-- foresee the destruction of the economy in their client’s smallest loss of advantage. Indirect recipients of some advantages--builders, for example, of vacation homes that give taxpayers more mortgage interest deductions--are no less worried. Tax-preparers fret about shrinkage in their business.

Starting Point

Others point out, more reasonably, that simplified tax plans may alleviate cynicism, but not guarantee compliance. “People don’t comply because they don’t want to pay the money,” says IRS spokesman Robert Giannangeli, “not because the tax plans are too complex.” Still, “if there are fewer deductions,” says David Keating, executive vice president of Washington-based National Taxpayers Union, “the IRS won’t be spending all its time tracking down tax shelters, and could go after the underground economy.”

There is also great concern about the transition. “Many people have organized their financial lives around existing tax law,” says the psychologist, “and they’d be clobbered by a sudden change--people spending 55% of their income on housing because of the interest break, for example. It’s really unfair to change the rules of the game abruptly.”

Lost in the squabbles and fear is the purpose of simplification--to make the procedure easy and fair for the greatest number of people. The proposed plans at least provide a starting point; choosing specific features comes later.

Lost also, or submerged, is the principle of taxation, which is to raise money. “Much in our tax laws now is designed to achieve goals beyond just raising revenue, such as credits to encourage construction of solar-powered heating, or political contributions,” says UCLA law professor Michael Asimow. “When you use the tax system to promote other goals, you make it more complicated.”

Tax simplification, writes New York banker Charles Morris, is “nothing less than the deregulation of the entire economy.” With the tax system freed of such burdens, everyone would be free to follow good financial sense, not tax breaks. “One of the problems with the current system,” says Keating, “is not that it’s complex but that it makes economic decisions more complex, affecting choices of what to invest money in, what job to take. It turns the system upside down.”