Jacob Sullum

In her most recent report to Congress, National Taxpayer Advocate Nina Olson notes that "tax expenditures" -- the exclusions, exemptions, deductions and credits that make the Internal Revenue Code such a bloated, bewildering behemoth -- total more than $1 trillion a year. She explains that she tries to avoid calling these provisions "loopholes" because that word has a pejorative connotation: "Policymakers use the term 'loophole' to describe a tax expenditure that they do not agree with ... and use terms like 'incentives' or 'sound government policy' to describe tax expenditures that they like."

President Obama illustrated that tendency in last week's State of the Union address, condemning "tax loopholes" for "the well-off and the well-connected," while advocating "incentives" for companies that hire Americans who have been out of work for a long time. Although Obama called for "bipartisan, comprehensive tax reform," his main goal seems to be raising taxes by limiting certain deductions.

Meanwhile, Obama has been pushing new tax breaks for people who behave as he thinks they should by (for example) hiring veterans, going to college, investing in "green energy," driving electric cars or making their homes more energy efficient. This is not the sort of reform we need, since it only compounds what Olson calls "the most serious problem facing taxpayers": the mind-boggling complexity of the 4-million-word tax code.

The tax code is so complicated, Olson reports, that individuals and businesses spend more than 6 billion hours a year complying with its filing requirements, which is equivalent to 3 million full-time workers. That cost totaled about $168 billion in 2010, or 15 cents for every tax dollar collected.

The tax code is so complicated that people have trouble figuring out what rate they are paying. Whatever it is, they're pretty sure others are paying less.

Olson cites a 2012 survey in which only 16 percent of Schedule C filers considered the tax code fair and only 12 percent believed others were paying their fair share. Since "no one wants to feel like a 'tax chump,'" she observes, that sort of sentiment encourages noncompliance, which

Even for those who are determined to obey the law, figuring out how to do so is no easy task, which is why nine out of 10 taxpayers either hire professional preparers or rely on tax software. But seeking such assistance is no guarantee against mistakes that can result in civil or criminal penalties. This kind of uncertainty undermines the rule of law, since even the most conscientious taxpayer cannot contemplate an audit with equanimity.


Jacob Sullum

Jacob Sullum is a senior editor at Reason magazine and a contributing columnist on Townhall.com.
 
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