Guest post by Bob Meyers, CPA
Is the tax code too complicated? Maybe, but I don’t think that should be the main focus of tax reform. No doubt the tax code under the Revenue Act of 1913 was less complex, but so was the straight-6 flathead engine in grandpa’s Ford pickup. When it wasn’t running right, he could remove, clean, adjust, and reinstall a half dozen parts and be back on the road in an hour. The more complex, computerized engine/electric motor combination in your new Camry provides a higher power to weight ratio, more torque, less pollution; you get the point; I’m a closet gear head. No, that’s not it, I mean complexity is good. No, that’s not the point either. The point is, simplicity is good, but complexity is sometimes necessary to get the results we desire.
We ask the U.S. income tax code to do a lot of heavy lifting. We want it to raise revenue, control the economy, create jobs, encourage and discourage certain activities, redistribute wealth, even participate in the country’s health care system. And, according to the 18th-century economist, Adam Smith, in his famous book “The Wealth of Nations,” we should make the code Equitable, Certain, Convenient, and Efficient. I’m sure we all lack the wisdom to do that in 66 words.
Consider just a few of the many things we ask our income tax code to help with:
- We want to encourage energy efficiency, so we have residential energy tax credits for installation of energy saving appliances and materials.
- We want to promote higher education, so we offer education credits and deductions.
- We want people to have health insurance so we fine those who don’t buy it.
- We want to help lower income workers, so we offer them Earned Income Credit.
- We want businesses to follow the law, so we disallow business deductions for fines paid.
- We want to promote charitable giving, so we offer a tax deduction for charitable contributions.
Maybe we could live with a tax code that does not do so much controlling of the economy, changing social behavior, or encouraging certain activities. This would allow us to get rid of many of those confusing tax code provisions. I could get behind that proposal.
Except we should keep the one that allows me to deduct mortgage interest payments on my house, and my sister still has kids in college, so the education credits need to stay.
And, I have a buddy with four young children who doesn’t make so much money; he really depends on the Earned Income Tax Credit (EITC).
Probably we can get rid of the energy credits. That would fix the code, and I replaced all my appliances a while back anyway.
Politicians are gearing up to take a run at the tax code. Of course, they want to do more than simplify the code. They want to make it better at doing all those other things we have come to depend on the Internal Revenue Code to do. President Trump said he wants a tax code that is “simple, fair, and easy to understand.” He said this means “getting rid of the loopholes and complexity that primarily benefit the wealthiest Americans and special interests.” I’ll go along with provisions that make wealthy Americans pay more since I’ll never travel in that crowd, but we have to keep the loophole that allows me to deduct my home office expense and the one that allows my friend to allocate some of his son’s college scholarship to taxable scholarship income so as to increase his American Opportunity Credit (wow, there’s an obscure little maneuver).
Speaker Ryan says “our tax system should be simple, fair, and promote economic growth.” He goes on to say it is currently “notoriously complex, patently unfair, highly inefficient, and is littered with special interest loopholes.” I applaud their efforts; I would not want that assignment. I have more faith than most that Congress and the President will come up with some reasonably good tax reform.
Both the President and Speaker Ryan have also indicated they want to reduce the number of tax brackets from the current seven (down to five or even two). I know this is not their main focus, and I know it makes a good tax reform mantra that we can all get behind but it makes me think of my buddy who mentioned that his new (used but new to him) Mercedes GLA has seven speeds. Maybe I should inform him of how much simpler and better his life would be if he could find a decent 62 Impala with a two speed Powerglide transmission.
I hope Congress and the President can improve the tax code and maybe in the process even simplify it but don’t expect a panacea. After all, we still have to raise revenue, control the economy, create jobs, encourage and discourage certain activities, and redistribute wealth even if the IRS will no longer participate in the country’s health care system. And remember, the Tax Code should be Equitable, Certain, Convenient, and Efficient.
Bob Meyers, CPA, is an Accounting Department lecturer and runs the UWisconsin – Whitewater Volunteer Income Tax Assistance (VITA) clinic.