On Dec. 23, the Treasury Department issued a new study of tax simplification. It discusses ways in which millions of taxpayers could be relieved of having to file any tax return at all. However, a new report by Congress' Joint Committee on Taxation (JCT) explains why this probably won't happen.
The problem of complexity has plagued the federal income tax from its beginning in 1913. As early as 1928, the JCT issued a report containing many familiar complaints. However, it concluded that there was a severe limit to tax simplification, because the complexity of modern business operations necessitated a high degree of complexity in the tax system.
Not only does tax complexity follow from business complexity, it causes it. As New York Times reporter David Cay Johnston details in his new book, "Perfectly Legal," many businesses are now organized in extraordinarily complex ways for the sole purpose of minimizing their tax burden. But legislative and administrative efforts to plug "loopholes" only create more complexity, which tends to create new tax-saving opportunities for the clever to exploit.
For big companies, tax complexity is a necessary fact of life, and they can afford to hire experts to figure it out. But for small businesses and individuals, complexity imposes a real cost. In 2002, the General Accounting Office found that small businesses overpaid their taxes by $18 billion over the previous two years because of errors on their tax returns. Another GAO report that year found that as many as 2.2 million taxpayers overpaid their taxes by not taking advantage of all the deductions they were legally entitled to.
A new JCT report shows just how hard it is to take advantage of all the tax provisions that might save on taxes. It lists all the so-called tax expenditures, including 5 pages of new ones enacted just last year. The really big ones, however, are not those that benefit big businesses, but the middle class. For example, more than 33 million taxpayers avail themselves of the mortgage interest deduction, saving them $59 billion in taxes. Thirty-eight million taxpayers claim deductions for charitable contributions, for a tax saving of $37 billion.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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