Concern About Tax Code Complexity

Our government has become significantly larger and more complex over the past century to accommodate the growing needs of an industrial nation. The legislature has so much to attend to it must delegate much of its work to regulatory agencies. It should come as no surprise, then, that our tax code has become fraught with unnecessary complexity as the legislature struggles to keep up with all the issues it must address, and at what cost to ordinary citizens? There are those who would claim there is no cost—we combat this complexity with increased specialization. They miss the point. Only the wealthiest among us are in a position to procure the assistance of all this specialized help. The result? Complex systems such as the tax code tend to favor those in power.

This is not to say that any simple system will change this fact. A pure flat tax, though immensely less complicated than the current tax code, would in all likelihood cost the average working person more money (or require large cuts to government spending). If the government chooses a tax rate low enough not to jeopardize the financial safety of families with lower incomes, it will not receive as much from the nation’s wealthiest citizens, creating a whole set of new problems.

Complexity in the Abstract

The tax code is not getting simpler. The Federal Standard Tax Reporter more than doubled its page count between 1984 and 2003, surpassing the 50,000 mark. Though this includes various IRS rulings, still the sheer size of the tax code is overwhelming. Concededly, real GDP also nearly doubled in the same time frame (http://www.measuringworth.org/usgdp/), but it is not clear why more money would necessitate more regulations.

The result of all this has been the same for some time—only the wealthy can afford the necessary help to understand (read: exploit) the tax system properly. Certainly it is the wealthy who have all the incentive to hire tax lawyers anyhow, as they are the ones with money to gain/lose, where many working class individuals would end up spending more on tax advice than they gain from taking it. The question is not how to change this fact (it will always be the rich who have the incentive to hire tax lawyers), but how to make tax lawyers less valuable. Theoretically, if the tax code was simplified to an unrealistically extreme extent, everyone, tax lawyer or no, would be on a relatively level playing field. Though obviating the need for specialized tax knowledge is probably not on the horizon, there is room to work in that direction.

Consider that just a couple months ago, the Los Angeles Times reported that Frank and Jamie McCourt? , owners of the Dodgers franchise, earned approximately $108 million between 2004 and 2009. Now stop; in your head, estimate what you think they paid in federal and state income tax or what you think they ought to have paid. They didn’t pay any. Through the amazing science of carry-forwards and deductions, the McCourts? managed to pay zero tax on $108 million. (LA Times)

More Specific Complexity

If that rubs you the wrong way, consider now Warren Buffett, a figure who needs no introduction. In 2007, he noted publicly that he is taxed on a smaller percentage of his income (17.7%) than his receptionist (30%), and this without trying to avoid paying higher taxes. He proceeded to bet a million dollars against the rest of the Forbes 400 if they could show that the same wasn’t true of them and their receptionists. No one showed any interest in the wager. (Washington Post && CNBC)

This fact stems in part from the way our tax code distinguishes between types of income. Income received from long-term capital gains (investments held for over a year) is taxed at a significantly lower rate than earned income, the worker’s income. The problem, of course, is that the poor are not the ones with capital to invest. Those whose incomes are high enough to fall in, say, the 35% tax bracket, generally have enough capital to profit from investment rather than labor. Instead of being taxed 35% on the money they earn by doing so (which would seem natural if we were to believe that those with greater means should bear a proportionally larger chunk of the tax burden), they are taxed only 15%. For comparison, in 2008, 15% was the tax rate that applied to single individuals earning between $8,025 and $32,550. The effect is essentially to create a subsidy to the rich and facilitate the ability to live on passive income.

"Change"

All of this isn’t lost on those in power. The Tax Reform Act of 1986 greatly simplified the tax code by consolidating brackets and reducing the number of deductions and taxed capital gains at the same rate as ordinary income. Since then, however, capital gains taxation rates have only declined, first to a maximum of 20%, then to a maximum of 15%. In part this is the result of the efforts of those who stand to gain from a lower capital gains tax (i.e. the rich), who, because of their greater means or determination or both (after all, greater means = more leisure time = more time to pursue political ends) are better able to represent their interests in the political process. A sort of policy circle has been created whereby the powerful endorse these complexities that perpetuate their power under the guise of encouraging investment (as if encouragement was needed).

That the tax code reverted back indicates too little concern about the code’s simplicity. It’s our role (at least if we choose it) both as citizens and as future lawyers to help represent the interest of those the political process tends to marginalize or ignore. Just as some may benefit from the good advice to abandon an underwater mortgage, many others could benefit from practical advice about what existing tax regulations or tax changes to endorse.

-- By JohnJeffcott - 26 Feb 2010