Why are Taxes so Complex?

Why Taxes Are So Complex

By Charles Kern

            There probably isn’t a soul out there who hasn’t asked why the tax laws have to be so complex.  The federal income tax code is so complex that many people cannot do their own return or just choose not to subject themselves to the process.  Recently, I came across a copy of a 1971, 1040 long form.  It was identical to today’s 1040A short form.  It is almost impossible to prepare any return, except most 1040As and 1040EZs, without high quality computer software.  But even if you have such software, understanding the result is beyond the comprehension of most people.

Folks ask why can’t we just have a simple single flat rate tax that is applied to all of a person’s income?  Well, I’ll agree that the present system is just too much.  But that simple flat rate tax won’t work.  You might want to tell me I’m wrong, but I believe that there is 5,000 to 6,000 years of human society to back me up.  If all we wanted our government to do with the tax were to raise revenue, it would work.  But we want the government to do a lot more with the tax.  The more things we want the government to do with the tax code, the more complex it must become.  I’m going to review with you what we expect of the tax code.  I’m sure that you will agree that one or more of these is a good idea.

The government needs revenue to operate.  I’m sure we all agree with that.  We might want it to be more efficient, but it does need revenue.

Many presidents lost the White House because they did nothing about the economy.  When times are bad we all say “Why doesn’t the government do something?”  In the past they have.  There were: job credits for hiring more employees, investment credits to increase equipment expenditures, more rapid write-offs for new buildings and equipment expenditures, and rate reductions to spur spending.  All noble goals, but complexities.

We all think that research and development is essential to our existence.  Most of us believe that we must explore new energy sources and conserve energy.  Many people think pollution is a problem.  And most folks agree that you cannot rely solely on social security for your retirement.  You ask, “Why doesn’t the government do something?”  They did: credits for research, credits for solar and geothermal energy development, credit for insulating your home, faster write off of pollution control facilities, and deductible IRA accounts.  All noble goals, but complexities.

You probably want to eat, so do we want farmers to go bankrupt?  Do we want farmers to conserve soil and water?  Do we want exploration for more and new natural resources? You ask, “Why doesn’t the government do something?”  That’s why farmers can defer the gain on crop insurance proceeds and mining companies get a percentage depletion allowance.  All noble goals, but complexities.

Everybody agrees that that small business is the back bone of our capitalistic system.  Does the government ever help?  That is why the tax code provides for LLCs, S corporation status, immediate writeoff of certain amounts of equipment purchases each year, and self employed pension plans.  All noble goals, but complexities.

Many things are in the tax code in the name of fairness.  Fairness, of course, like beauty, is in the eye of the beholder and changes with time.  Why, you ask, doesn’t the government do something?  Well they gave us the earned income credit, child and dependent care credit, nontaxability of health care benefits, and the now defunct Schedule W deduction for married folks who filed jointly.  I also presume that single people pay higher rates in the name of fairness.  Do you remember how unfair it was in 1986 for those businesses to have profits and no taxes?  Well they paid no tax because of all the worthwhile credits that were mentioned earlier.  All noble goals, but complexities.

Deductions and credits for special interest groups are often viewed as bad.  In fact, though, these are sometimes “fairness” items that just happen to apply to the other guy and not you.  Is a tax break that benefits only Tulane University in Louisiana wrong, but okay if it benefits only Penn State?  I guess, as a Penn State Alumnus, I’d have to say yes.  Seriously, though, I don’t think any of us like tax breaks designed just to “buy” a congressman’s or congresswoman’s vote.  Noble goals, perhaps, but complexities.

I could go on, but I suspect you get the point.  We and our government, like all persons with government in recorded history, want a lot accomplished with and by our tax code.  The more varied and complex our wants, the more complex our tax code.  The real question is whether we have stepped beyond the world of reason into the “Twilight Zone?”