Oh for Those Tax Forms of Yesteryear
Maybe it’s regressive, but anyone who looks at old tax forms can’t help yearning for old times--kinder, gentler times, tax-wise.
Take 1913, the year the 1040 was introduced--all four pages. One page of instructions (eat your heart out). A sheet for adding up gross income. A sheet for “general deductions.” A sheet for calculating net, then taxable income from the gross.
Not much, but some people believe that it’s enough. They’d even like to go back to it.
Unfortunately, it’s probably too late.
The old form seems simple and eminently serviceable. Gross income includes all wages and compensation, plus monies from businesses, investments and rentals. Deductions include business expenses, interest on personal debts, non-federal taxes, losses and wear and tear on property.
Gross income minus deductions yields net income. Taxable income is that net income minus dividends, income already subjected to withholding and an exemption of $3,000 for single people or $4,000 for a couple.
The advantages are obvious. “It would eliminate the need for over 240 tax forms to support the code, itself over 1,100 pages now,” says Joseph Weiss, a West Hollywood tax accountant.
But there are disadvantages. For one thing, it wouldn’t raise much money. The “normal tax” was only 1% of that final taxable income. Really rich people, who had net income of over $20,000 (before all the calculations), were assessed an additional “super tax” ranging from 1% to 6% on amounts over $20,000.
This means that the government might have gotten only $1,235 in tax from someone with income of $100,000 and deductions of $27,500 ($25,000 in mortgage interest and $2,500 property tax).
Back then, the federal government had other tax sources. Only $28 million of the $380 million collected in fiscal 1914 was from individual income tax. Most came from taxes on products. Liquor and tobacco brought in $300 million. Oleomargarine, colored and uncolored, was good for $1.3 million.
We could do this again, of course. Jerry Brown’s tax plan also limits personal income tax and taxes products: His “value added” tax on business is in essence a tax on everything as it leaves the plant.
It would be easier just to tinker with the 1913 income levels and tax rates. “We could come up with a formula for how much is needed,” Weiss says, “then change the percentages. And we’d save billions in administrative expense, bureaucracy, instructions and forms.”
Less alterable, however, is the current complexity of the law. The biggest difference between 1913 and 1990 seems to be in the rates and the specific deductions, “but it’s not itemized deductions that give the law complexity,” says Rob Giannangeli, IRS spokesman in Los Angeles. “It’s the determination of adjusted gross income.” Today’s 1040 starts with a page of income sources, many calculated on separate attached forms, each treated differently for tax purposes.
One reason “the code has turned into this monster,” says CPA Philip Holthouse in West Los Angeles, “is that life is more complicated. We have types of financial instruments people hadn’t dreamed of then, and pages and pages of regulations on how to tax them.”
We can also blame the constant point-counterpoint of congressional money raising. As the government needs more money, it seeks more things to tax and higher rates, and each new tax soon has exceptions. Some are what Holthouse calls “social exceptions, so you don’t hurt people you don’t want to hurt.” Many protect special interests--mortgage interest deductions, for example, which favor homeowners, supported by the banking and building industries.
Similarly, each deduction soon has limitations. Most itemized deductions are now subject to limits of one kind or another--sometimes a floor, sometimes a ceiling--as income level rises.
It’s just a “political charade,” Holthouse says. Instead of frankly and openly raising tax rates, Congress just “phases out” deductions at higher income levels. That way they can still say “No new taxes.”
Wholesale change, alas, is probably no longer possible. No one would support giving up all the complexity, even for a simplified form. In fact, they have one now, Giannangeli says--the 1040A--but two-thirds of taxpayers still find it to their advantage to use the 1040.
A four-page form would hardly get the support of the people who actually prepare 48% of individual returns. “There are so many accountants, attorneys and tax preparation services,” Weiss says, “(they) would kill it.”
Finally, Congress wouldn’t let it happen. And if it did, legislators would go right back to chipping away at the plan’s provisions, until it became complicated all over again.
