Do Taxes Have to Be So Damn Complicated?

April 17, 2012

I spent two and a half horrible days last week preparing my 2011 federal tax returns.

Worst of it was trying to answer questions my tax software was asking — and not because I hadn’t diligently squirreled away the mass of documents I thought I’d need.

It was the questions themselves — so many and some so perplexing, though I was quite sure I was supposed to know the answers.

Bookending the apparently relevant questions were long lists of potential deductions and credits I had to skim lest any apply. None did.

By the end of the process, I was ready to endorse a flat tax — that perennial favorite of far-right politicians and their think tanks. Well, not really.

But I truly was half-ready to get on board with Congressman Paul Ryan’s tax reform plan — not the rate reduction part, but the clean-out of the tax code that he claims would pay for it.

Shows how doing your taxes can drive you crazy.

As you’ve probably read, Congressman Ryan hasn’t said what tax breaks he’d get rid of. Nor has Mitt Romney, whose tax reform plan looks a lot like Ryan’s.

Smart move on their parts because the most costly tax expenditures — the technical name for policy preferences promoted by foregoing revenues — aren’t in those lengthy lists I skimmed.

They’re widely-applicable exclusions, deductions, credits and the like — employer-paid health insurance benefits, interest on home mortgages, contributions to retirement plans, etc.

Can you imagine the outcry if Congress decided to eliminate them?

And arguably it shouldn’t — not, at least, without making other policy changes to support the same goals.

The Earned Income Tax Credit, for example, is one of the largest and most effective anti-poverty programs we’ve got. In 2010, the Census Bureau reports, it lifted 5.4 million people above the poverty threshold.

Other tax expenditures also support major priorities, e.g., encouraging savings for a college education and retirement, home ownership, charitable giving.

But tax expenditures cost the federal government a lot — nearly $1.3 trillion this year alone, according to Donald Marron at the Tax Policy Center.

Some of them smack of nothing but successful lobbying — the now-famous corporate jet tax preference, for example, and a special deduction for alpaca breeders. Yes, really.

Seems to me we should get rid of these, though the savings would be relatively piddling.

But what about the more costly tax breaks that we who file as individuals may claim? There are good arguments against them too.

First off, most of them make our tax system less progressive since deductions are worth more to people with higher incomes.

A family in the top bracket, for example, gets more than twice the benefit per dollar paid in mortgage interest as a family in the 15% bracket. And, of course, families at the bottom of the income scale get nothing because it’s all they can do to afford a place to rent.

Second, economists say that tax preferences are generally inefficient. Those top-dollar individual benefits in particular are a waste of money because they reward people for doing what they’d do anyway.

Also, I should add, reward what we’ve no good reason to reward at all. Why give up needed revenues to reward a family for buying a vacation home in, say, La Jolla — or, for that matter, a yacht?

Top of my list, however, is the lower tax rate on long-term capital gains and qualified dividends — much on my mind after laboriously itemizing these.

I’ve never understood why tax policy should prefer wealth over work. The argument that the policy encourages the kind of risk-taking our economy needs seems to me stuff and nonsense.

What would we do if the money our money earns were taxed at the same rate as money we earn by working? Put in under the mattress?

The President, as you know, is pumping the Buffett rule. And surely it’s reasonable to collect a reasonable amount from millionaires — and billionaires like Buffett.

Nearly a quarter of them, we’re told, paid at a lower rate than comfortably middle-class filers during the most recent year the Internal Revenue Service can report on.

But we wouldn’t need yet another complexity in the tax code if we’d merely apply the same rate to investment income as to income earned by the sweat of the brow.


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