National Taxpayer Advocate Nina E. Olson recently joined the chorus of voices calling for a major revamp of the nation’s tax laws.
“There has been near universal agreement for years that the tax code is broken and needs to be fixed,” Olson said in her 2010 Annual Report to Congress, released in January. “Yet no broad-based attempt to reform the tax code has been made. This report documents the burdens the tax code imposes on taxpayers and explores why many taxpayers may nevertheless feel wedded to key aspects of the current system, undermining efforts at reform.”
Huge Word-Count Increase
Olson said the tax code nearly tripled in size during the last decade—to 3.8 million words in February 2010 from 1.4 million in 2001. She estimated Americans spent 6.1 billion hours preparing their returns each year — the equivalent of 3 million employees working full-time. By comparison, the federal payroll has 2.1 million full-time workers.
Olson reported taxpayers “find return preparation so overwhelming that about 60 percent now pay preparers to do it for them. An additional 29 percent use tax software, with leading software packages costing $50 or more. IRS researchers recently estimated that the annual monetary tax compliance burden of the median individual taxpayer (as measured by income) is $258 billion,” Olson reported.
Though there have been changes to the tax code in the name of reform, the changes have actually had other drivers, according to Olson.
“It is sometimes suggested that taxpayers are looking for a free lunch—that they want to see lower tax rates but keep their tax breaks and retain their government benefits, all while balancing the budget,” Olson wrote. “But this perspective overlooks the fact that federal tax and spending policies are complex, and most people don’t have the time to study these policies in detail. Our aim is to improve public knowledge of the trade-offs involved and to help policymakers and the taxpaying public conduct a more informed conversation about tax reform alternatives.”
Olson’s report states if tax rates are to be substantially lowered, many existing tax breaks will have to be eliminated immediately and others will have to be phased out. She said she believes most taxpayers would accept lower tax rates in exchange for a simpler system.
The Taxpayer Advocate has called for tax code simplification in every report to Congress since 1998, said Dan Pilla, a tax litigation consultant, author of 11 books on IRS defense strategies, and operator of the TaxHelpOnline.com Web site.
‘A Byzantine Compliance Mess’
“The tax law is a convoluted, Byzantine compliance mess for taxpayers, and for the IRS it leads to a myriad of forms, regulations, and publications,” Pilla said. “It becomes increasingly difficult every year. We are long past the point of needing radical tax reform. When the 16th Amendment [authorizing the income tax] was ratified [in 1913], fewer than one-tenth of 1 percent of citizens had to pay because of the way the tax brackets worked. The whole tax code was only 150 pages long.”
The basic tax instruction booklet alone now covers 179 pages, compared to only 117 pages in 2000, according to Pete Sepp, executive vice president of the National Taxpayers Union in Alexandria, Virginia.
Although interest groups have expressed concern about losing their favorite tax breaks, such as the mortgage interest deduction, the deductions and credits are only minor issues, Pilla says. The biggest worry is the Alternative Minimum Tax.
‘System Fundamentally Flawed’
“The AMT is a secondary tax system that is an admission that our primary income tax system is fundamentally flawed,” Pilla said.
In theory the AMT is designed to ensure everyone pays at least some minimum amount of income tax. However, whereas the regular tax brackets were indexed for inflation beginning in 1986, such adjustments where never made for the AMT, meaning hundreds of thousands more taxpayers end up in the AMT system every year. Most don’t know it until they receive an IRS notice after filing their returns, according to Pilla.
Eliminating the AMT would cut a significant amount of complexity out of the tax code, Pilla said.
Phil Britt ([email protected]) writes from South Holland, Illinois.