Tax Day 2013: Why Simplifying the Tax Code Isn't So Simple

Nothing about America’s tax code is simple. Our tax forms seem to be nothing more than an experiment in best practices for confusing the largest number of people at one time. Was it always this bad and is it necessarily really a bad thing?

First, we have to understand that the complexity of the 1040 form has gotten much worse over time. As David Yanofsky points out in his article for Quartz, over the last 20 years the length of the 1040 form has increased by 21 percent.

Here's a short graphic of how the code has changed over time:


 

The length of the instructional booklet for the 1040 form has also doubled in size to 189 pages. That is because each line is filled with a different set of instructions, which can apply to different people at different times. That brings us to why simplifying the 74,000 page long tax code isn't all that simple. 

When some deductions and some credits are taken away from some people, it results in a more complex code. So even as lawmakers seek to streamline the tax system, it can really just create more lines of code attached to longer appendices. Question any lawmaker that makes blanket statements concerning the tax code. Every deduction, every incentive must be met with an explanation. As Congress takes away or expands incentives, tax breaks or credits, the tax code increases in size. The best example of this is perhaps with the 20 various kinds of tax-preferred savings accounts someone can choose from. Each of those accounts comes equipped with a different set of rules. People say they want a simpler tax code but they don’t want to pay more taxes, or give up any of their deductions or credits. There’s an obvious disconnect here. Bruce Bartlett wrote an article concerning this for the New York Times and he’s spot on;

“Historically, however, voters have been unwilling to support meaningful simplification efforts and happily put up with complexity if it saves them in taxes. They seem always to fear that “simplification” is some sort of code word for raising their taxes while reducing someone else’s.” 

Does that mean that tax reform should never be considered? No. The last time there was a tax overhaul was a quarter-century ago. The barriers that currently prevent us from addressing the tax code are quite large. That is in part because the tax industry itself is quite large. If tax compliance was considered an industry it would be one of the largest industries in the United States. In short, there are a lot of people who have large amounts of money invested in keeping the tax code as complex as possible.

Here's a short video on how the industry of tax preparers in the U.S.:


 

One of the best examples of this is the mortgage interest deduction. The intent of the deduction is to encourage home ownership, this sounds like a great thing right? Well, if you’re wealthy it’s a really, really, really great thing. Households with incomes above $250,000 are able to write off 10 times more from their tax return due to this deduction than the average household. That’s an example of what is called an “upside-down” deduction. It is something that the super wealthy use to their advantage and it helps them avoid paying taxes, something the average American family just isn’t privy too. When we complain about the complexity of our tax code, we should also be complaining about the inequity of it. 

What reforming the tax code really involves is a lot of people giving up things that save them money. As you can imagine, that's not very popular. Every time you close a loophole, someone will be there to try to open another. By someone, I mean around 17,500 someone's in the form of registered tax lobbyists. Does the tax code need to be overhauled, yes. Is it that simple. No. Everyone wants to protect their own share of the tax code. So unless we are all able to come to a miraculous consensus that the best thing for the country is to simplify the code — even if that means giving up some of our sacred tax cows — we shouldn't expect any significant change to happen any time soon.