Guest post by Russell Fox
In Tom Clancy’s Executive Orders, there’s a scene where the Secretary of the Treasury designate puts the entire Tax Code on a desk, and the desk collapses. That’s an apocryphal image, but it does represent what’s happened with the United States’ tax system today. It’s far, far too complex for the average American to understand.
The complexity in the Tax Code leads to lesser compliance with the law. For example, take gambling. Amateur gamblers are supposed to separate out their winning sessions from their losing sessions; winning sessions are noted as part of “Other Income” while losing sessions (up to the amount of your gambling winning sessions) are included as an Itemized Deduction.
Most gamblers simply ignore this on their taxes (unless they receive a W-2G). If gamblers could simply note their net win on their tax return, they’d be far more likely to include their gambling winnings on their returns.
A simpler Tax Code would also lower compliance costs for Americans. Today, many of my clients are people who shouldn’t need a tax professional—people who we think of as average Americans with typical lives. These clients tell me that the complexity has driven them to a professional. As I tell my friends, I have lifetime employment.
Additionally, there’s no reason for favoritism in the Tax Code. Thanks to lobbyists, the Tax Code is littered with examples such as real estate. Mortgage interest and property tax are tax deductible (itemized deductions) for homeowners; rent is not. The same favoritism is present in business taxes, too. The Domestic Production Activities Deduction is for manufacturers of tangible products. Thanks to lobbyists, software, an intangible good, is eligible for this tax break. The real estate and software industries have excellent lobbyists.
A simpler Tax Code would be easier for the IRS to administer, lessen compliance costs for both individuals and businesses, and would almost certainly lead to increased tax collections at the same tax rate. Unfortunately, what I’ve seen in the initial proposal from President Trump is a lowering of rates without changing the Tax Code.
There is no doubt that if tax rates decrease, taxpayers will pay less. In that sense, President Trump’s plan is a win for the average American. But why not aim higher? Why not put the current Tax Code in the shredder and make something that’s simple and straightforward? We could both lower tax rates and keep it revenue neutral.
The reality is that Congress benefits from the complexity. Lobbyists spend their largesse on Congress, and our Congressional representatives are the beneficiaries. Maybe Congress will surprise me. Being cynical, I doubt this will change.
I’d love to be surprised out of what emerges from Congress (if anything). I suspect, however, that my cynicism is well placed.