Waiting on Obama

Dear President-elect Obama:

Maybe it’s because tax season is looming ominously -- or maybe it was your long list of campaign promises -- but taxes are at the top of my mind when thinking about my financial wishes for 2009.

My one overriding hope: that you will show far greater courage than your three most recent predecessors when tinkering with the tax code.

What does courage have to do with taxes?

At the moment, not a thing. The U.S. tax code is riddled with complexity ultimately caused by a lack of courage. And this complexity makes it virtually impossible for most Americans to file accurate tax returns -- with or without help.

More than two-thirds of taxpayers now rely on a paid preparer or software to file, even though fewer than one-third of taxpayers itemize deductions.

But even tax professionals make mistakes on 65% of the returns they prepare, according to a recent study by the Treasury inspector general for tax administration.

What makes the tax code so mucky? Over the last 22 years, Washington has engaged in games that could be called Hide the Unpleasant Reality and Give Me Credit.

For instance, welfare has a negative connotation, so we did away with some direct payments to the poor and created the earned income tax credit for the working poor. This provision can give as much as $4,825 to a family that pays no federal income tax.

In other words, it’s a subsidy. But we don’t have to call it welfare because it’s administered through the tax code.

What’s the harm in that? Millions of people who would otherwise have no obligation to file income tax returns -- because they don’t make enough money -- must file returns to claim the credit.

Not only do they have to file, but the credit is so complicated that the vast majority who claim it hire a preparer. Still, about one-third of the claims are flawed.

Of course, if this subsidy was delivered through the welfare system instead of the tax system, people would still have to apply for the benefit. But it’s likely they’re already receiving food stamps, so at least the bureaucracy would be familiar.

Another example: The idea of “means testing” for Social Security -- reducing or eliminating benefits for high-income people -- brought howls of protest.

So now the government subjects some or all of a high-earning recipient’s Social Security benefits to income tax. And now all Social Security recipients have to fill out a 19-line work sheet to calculate how much of their retirement benefits are taxable.

You might be surprised, Mr. President-elect, to learn exactly what “high income” means when it comes to paying tax on Social Security benefits. For regular income tax, married couples don’t reach the top tax bracket until they make more than $350,000. But if you collect Social Security, you’re a Rockefeller as soon as you make about $35,000.

As a consequence, some middle-income seniors are in effect in a higher tax bracket than some millionaires are.

There’s more: Every lawmaker, it seems, wants to get credit for helping middle-income families achieve laudable goals, such as funding their retirement or sending their kids to college.

The result? An absolute pileup of competing tax breaks.

Want to save for retirement? Just pick a plan. There are traditional individual retirement accounts, Roth IRAs, traditional 401(k)s, Roth 401(k)s, 403(b)s, 457 plans, Simple plans, SEPs, Keoghs and tax-deferred annuities. This smorgasbord of plans was added to the tax code over many years. Each one has its own contribution limits, exclusions and other rules. So although you can contribute $5,000 a year to an IRA, you can pump $10,500 a year into a Simple and $15,500 into a 401(k). And your ability to contribute may depend on your employment status, your income and how much your co-workers contribute.

Want tax help paying for child care? There’s a credit and an “income exclusion.” Pick one.

College? There are at least five major breaks and myriad minor ones. It’s enough to turn a taxpayer gray and a tax accountant rich.

Mr. President-elect, you have identified a number of worthy things you want the government to help pay for: child care, college, clean vehicles and healthcare. And you want to accomplish all that with new tax breaks.

These are popular ideas. But I’m asking you -- pleading, really -- not to do it. If you want to fund a social program, go for it. But have the courage to do it directly.

You’ve said you want to make college more affordable with a new $4,000 tax credit. Don’t do it. We don’t need another complex tax break. If you want to help finance college, improve the federal Pell Grant program, which has been neglected for years.

If you want to help pay for child care, provide a subsidy, not a tax break. That way, instead of 150 million taxpayers being subjected to additional lines on their 1040 forms as well as more work sheets and income tests, only parents with children in day care would apply for the subsidy.

Will you be criticized if you replace the earned income tax credit with welfare payments? Absolutely. But you’ll save millions of people many hours of work, not to mention tax-preparation fees. And you might just free up a few IRS agents, who could spend their time going after scofflaws rather than the merely confused.

President-elect Obama, we taxpayers need you to be brave. We need you to stare down the forces of obfuscation and call social programs social programs. If you can justify them, fund them. But don’t hide them in the tax code.