Every year on April 15th, citizens and non-citizens, residents and US expatriates alike must file state and federal income tax returns in order to settle up with the government.
Few people really understand the what, why and how of Tax Day. With a nearly 4 million word federal tax code that only trained professionals and tax filing software can navigate, most taxpayers pay up without knowing what exactly they’re paying or the rational behind the taxes they’re required to pay. Deductions, credits and refunds can easily be mistaken as money from the government, with taxpayers forgetting that they fronted the cash in the first place. The US Taxpayer Advocate at the IRS, Nina Olson, recently said, “Many people don’t know why they’re getting the results they’re getting” after filing their taxes. But with professional accountants and free tax software to help taxpayers navigate the process, does tax complexity even matter?
The answer is emphatically YES. Here is why.
Tax complexity is evidence of poor design on the part of lawmakers and unclear thinking at the highest levels of government. Good tax policies are simple, stable, and visible. When tax policy moves outside these bounds, inequities and inefficiencies most certainly exist, and taxpayers lose transparency and accountability in the tax system. When taxpayers don’t know what is in the tax code and why, they have less ability to hold elected officials accountable. It is harder to have a healthy dialogue about important questions, such as what is the proper way to treat children in the tax code? Should the tax code be used to reward or punish certain behaviors? If someone choses taxpayer subsidized government healthcare, should they then receive an additional tax credit? Without knowing what really goes into the tax code, taxpayers lose an invaluable opportunity to participate in government and hold their elected officials accountable.
Tax complexity hampers transparency and accountability of the IRS, and the government more broadly. The IRS is a massive bureaucracy tasked with coercing tax dollars from taxpayers, using nearly 83,000 employees to do so – none of who are elected. The Department of the Treasury has oversight of the IRS via a nine-member IRS Oversight Board created by Congress. The Board’s responsibility is to oversee the IRS in its administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws. However, if an individual taxpayer has problems with the IRS, the first place he or she is directed to go for help is the IRS!
Even worse, the IRS has a track record of failing to comply with federal law. As one example, under the IRS Restructuring and Reform Act of 1998, the IRS is required to provide annual recommendations for reducing the complexity of the administration of Federal tax laws and to find ways to repeal or modify provisions of the tax code that add undue and unnecessary complexity to the tax code. However, the IRS has only ever issued two reports. It should scare taxpayers that the IRS expends many resources to extract every last dollar owed by an individual taxpayer, but won’t dedicate the resources necessary to produce a legally mandated report on how to improve their own performance. As Grover Norquist, president of Americans for Tax Reform, said, “An unexamined bureaucracy is a threat to taxpayers and all living things.” Because the IRS is the tax administrator, it is the only agency that has certain data about the tax code’s complexity and administrative problem areas.
Tax complexity costs the US economy $233.8 billion a year and 6.1 billion hours to comply. A study from the National Taxpayers Union Foundation found that tax complexity essentially prevents anyone from being able to comply without professional assistance. Paid preparers and tax preparation software account for 94% of returns last year. The challenges of understanding and complying with the federal tax code will only become greater in the future, thanks to the additional complications created by the Affordable Care Act. This year alone, 3,322 pages of legal guidance have been added to IRS.gov for the ACA.
Regardless of how much taxpayers care about economics, compliance costs, redistribution or any other facet of the complex tax code, they should care about how well they understand the reason the government takes their money away from them every year. A simple, transparent tax code not only makes compliance easier and more efficient; it allows taxpayers to hold government accountable.
Sources: Tax Foundation; Americans for Tax Reform; National Taxpayers Union Foundation