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In more than four decades of journalism, I’ve encountered countless politicians who pledge to make the tax code simpler. They sound like me, at the Christmas dinner table, vowing to make my waistline slimmer.
Instead, the opposite happens.
As you may discover this weekend, if you haven’t already, filing income tax returns has become more complicated year after year, especially if you choose to itemize. The tax code is somewhere near 7,000 pages long, depending on the font size you prefer.
Take President Biden’s Inflation Reduction Act, for instance. It may not have done much to curb the price of goods, but it did manage to inflate the complexity of the tax code.
As the independent research group the Tax Foundation noted a few months ago, the act created “two new corporate taxes and either expanded or launched 26 tax credit programs.”
Each one comes with pages of rules. Most likely, you’ll need to hire a tax expert just to know they’re available. If so, you will hardly be alone. The IRS reports that 85 million e-filed tax returns last year were prepared by hired professionals, compared to 67 million prepared by the taxpayers themselves.
If you had a clean slate and could design a nation’s tax structure from scratch, would you ever deliberately build something like this?
The federal government likes to incentivize people into doing things it thinks are beneficial, such as buying a house, contributing to charity, having children, buying electric vehicles, installing solar power and on and on. Some of these, like the charitable deduction, are worthwhile. But too many little deductions and credits make taxes unreasonably complex.
The foundation said Americans in 2022 spent more than 6.5 billion hours combined to file and report their individual and corporate taxes. That translates to 3.1 million full-time workers doing nothing else, which it said is about equal to the populations of Philadelphia and San Antonio combined.
And every little new tax credit and deduction adds to this.
Sweden is well-known as a country that taxes its people’s incomes a lot. And yet, while Americans would recoil at its marginal rates, they would be envious of the way it collects the money. Every year, before the deadline on May 2, every Swedish earner receives four pages of tax forms, already filled out. If everything looks good, you can log into the tax department and sign them electronically. Some people do so through their phones, by text.
Think this wouldn’t work here? A study by four economists published last year, involving a large sample of returns from 2019, found that the IRS could accurately fill in tax information for between 64 million and 73 million returns, which would equal 42% to 48% of all returns filed that year.
It wouldn’t work for everyone. The more money you make, the more dependents you have or the more deductions you claim, the less accurate the numbers become. But for nearly half the population, it would eliminate a lot of headaches and worries, not to mention the cost of hiring someone else to do their taxes.
The Inflation Reduction Act included $15 million to study creation of a free IRS tax-filing website that would essentially do what Sweden does. But, as Business Insider recently noted, the IRS faces challenges with a shrinking staff that may make it difficult to do this, even with the $80 billion extra the act gives the agency over 10 years.
There is more to worry about here than just the headaches and expense of filing taxes. Trust is at stake.
The more complex the tax system is, the less transparent and trustworthy it seems. As Pew Research Center uncovered in a recent poll, 61% of Americans say they are bothered by the feeling some corporations aren’t paying their fair share, while 60% are bothered by the same feeling about wealthy individuals.
Complexity breeds suspicion, and it’s not altogether unwarranted. Wealthy people can afford tax attorneys to help them discover loopholes, credits and deductions amid those 7,000 pages of tax code that average people can’t find on their own.
People are cynical enough about Washington. A simplified tax code would give them one less reason to feel that way.
But, if history is a guide, don’t expect it any time soon. Every deduction and credit comes with a lobby ready to protest, buy ads, demagogue or do whatever it takes to protect the status quo. The tax preparation industry is valued at $14.4 billion, according to ibisworld.com.
That, of course, won’t keep politicians from making promises.
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