It seems like no one can avoid trouble with their taxes. Even politicians constantly seem to have tax problems - even the ones who focus on financial laws. In 2008, Timothy Geithner was nominated for Secretary of the Treasury. His nomination was successful, but not until after it was discovered that this trained economist and monetary expert had underpaid his taxes in the previous decade by $34,000. The mistakes were attributable to Geithner's misunderstandings about his own tax status and it's understandable: the U.S. tax code is so complicated that even an advanced degree won't guarantee that you can understand it.
Barriers to Change
Why won't Congress do something to simplify the tax code? It's one of the few tax issues that everyone, across party lines, seems to agree on. But instead of reducing the complexity of the tax code, it seems like Congress only creates more loopholes and regulations. It's rare that a politician makes simplifying tax law a priority; for someone running for election, it's easier to campaign on a promise to give tax breaks than on anything else.
The Impact of a Complicated Tax Code
When the elections are over and a politician moves into Congress, it's easier to pass new laws to modify old tax provisions so that those regulations have a more precise impact. It's also common for new legislation to be written without a clear idea of how it will impact the existing tax code, leaving the IRS to sort out how to enforce conflicting regulations. When you add in the different provisions and changes with expiration dates, it's amazing that more taxpayers aren't in trouble for filing their taxes incorrectly. Of course, all of the different deductions make it easier to cheat on one's taxes. For the most recent year that the IRS has data for (2006), an estimated $385 billion is essentially missing. The IRS collected 86% of what should be owed in federal taxes in 2006 and it's unclear how much of that shortfall is attributable to taxpayers actively cheating on their taxes and how much to taxpayers who just didn't complete their tax returns correctly.
The claims that special interests lobby for tax deductions and other breaks, making the tax code more complicated, have some truth behind them. But many of the most complicated tax deductions and the most wasteful were created with the best of intentions. The tax code currently includes more than 20 different types of tax-advantaged savings accounts for higher education, plus even more incentives. Each of these accounts has its own limitations, eligibility requirements and other regulations, adding pages to the tax code. Trying to reduce the number of ways the government helps students go to college is not a move that most politicians want to make.
Why It Needs to Change
There are plenty of arguments in favor of simplifying the tax code: not only do all the deductions and loopholes mean that the IRS needs a large budget of its own to keep track of all the details, but economists suggest that tax cuts and tax reductions don't help the economy. The home mortgage deduction, for instance, is supposed to drive the purchases of new homes. But the numbers suggest that only taxpayers who were likely to purchase a home make use of it, and they do so to take on bigger mortgages than they might have been able to afford without the deduction. Overall, the tax code's complexity is leading to lower tax revenues for the government, making it harder to fund programs that have been proven to offer a positive impact.
The Bottom Line
But the reality is that making the tax code easier to understand will be an incredibly tough sell in Congress. For decades, taxes have been the main tool by which the federal government has encouraged the general population to take one action or another. Simplifying the tax code would require Congress to change its underlying methods of governing. It's not just a question of rewriting the tax code more concisely.
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