Alan Reynolds

Even though I often write as though I know something about taxes, I could not possibly finish my tax return by April 15. Begging the IRS for more time has become an annual certainty, although IRS auditors must be glad to put off looking at my oversized return as long as possible.

The problem began years ago, when I made the mistake of saving and investing. That means I must now report in intricate detail each sale or purchase of stock, and the precise source of every dollar of interest income and dividends. This bookkeeping requires a dozen extra pages, several weekends and many pots of coffee. Congress does not even let me deduct the cost of that wasted time.

With investment income, you have to make quarterly guesses about how much tax you will end up owing, which depends on how your investments end up doing. It is difficult to guess the net effect of gains and losses, and impossible to predict how the alternative minimum tax is going to bite. You can't guess right, but if you guess wrong there are penalties.

It would not be that difficult to make tax reporting much, much simpler. Unfortunately, tax simplification has lately become a matter of ritual rhetoric with little substance. The discussion has been bogged down by myths left over from the Tax Reform Act of 1986:

The first myth is that bringing the top tax down from 70 percent in 1981 to 28 percent by 1988 was paid for by eliminating itemized deductions. An editorial page writer for The Wall Street Journal Europe recently wrote "in the 1980s, Ronald Reagan accomplished his tax reform by trading lower rates for fewer loopholes."

That alleged link between tax rates and loopholes is widely believed but totally untrue. After the 1986 law was phased-in, deductions were still 23.1 percent of gross income from 1988 to 1993 -- exactly the same as the deductions from 1980 to 1985. Itemized deductions were somewhat smaller, but standard deductions were larger.

Loopholes did not have to be closed because revenues did not fall. Individual income taxes amounted to 9.3 percent of personal income tax in 1983-85 (when the top tax was 50 percent) and 9.4 percent in 1988-90 (when the top tax was 28 percent). The highest tax rates were subsequently increased in 1991 and 1993, but the income tax then dropped to 8.9 percent of income from 1991 to 1994. A top tax of 28 percent tax, while it lasted, paid for itself through increased labor force participation and reduced tax avoidance.

Alan Reynolds

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