The Price of Democracy; It Costs Us $100 Billion or More to Do Our Taxes, Because the System Is So Complex. the Trouble Is That Both Political Parties like It That Way

Newsweek, May 17, 2004 | Go to article overview
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The Price of Democracy; It Costs Us $100 Billion or More to Do Our Taxes, Because the System Is So Complex. the Trouble Is That Both Political Parties like It That Way


Byline: Robert J. Samuelson

Eugene Steuerle is one of Washington's ranking policy wonks--a term used here with respect. He's forgotten more about taxes in the last 15 seconds than most of us will ever know. He arrived in Washington in 1974, worked for years at the Treasury and moved in 1989 to the Urban Institute, a think tank. Steuerle has just written a book, "Contemporary U.S. Tax Policy," that ought to be studied by every member of Congress and, more important, addresses the insistent question: why is the federal tax system such a mess? The answer, in a word, is democracy.

In theory, it's easy to imagine a simple tax system with low rates, a broad tax base--the amount of taxable income--and substantial "progressivity," meaning that the rich pay higher rates. But in practice, it's been elusive. Democrats and Republicans alike are too eager to use the tax breaks to advance various social, economic and political agendas. The resulting tax code is so confusing, complex and contradictory that it costs taxpayers (in accounting fees and the value of their time) about $100 billion annually to complete their returns, estimates economist Joel Slemrod of the University of Michigan. In 2003, that roughly equaled the combined spending of the departments of Education ($57.4 billion), Homeland Security ($32 billion) and State ($9.3 billion).

The appeal of tax breaks is that they give "the appearance of reducing the government's size... even as government interference in the economy increases," writes Steuerle. But a tax system that promotes various causes (more saving, more health insurance, college attendance) cannot be simple. It brims with provisions. Goals conflict; contradictions are unavoidable. Similarly, a system that favors some taxpayers (homeowners, the elderly) must disfavor others. "Fairness" suffers.

Of course, the rich often try to skirt taxes through abusive shelters. But it's a myth that legal tax breaks mainly benefit the wealthy. The government publishes a yearly list of "tax expenditures," indicating the costs in forgone taxes of different breaks. These favor the middle and upper-middle classes. Here are some of the biggest for 2004: tax-free employer contributions to pensions and 401(k) plans, $123 billion; tax-free employer payments for health insurance, $120 billion; the deductibility of interest on home mortgages, $68 billion; charitable deductions, $43 billion; the exclusion of some Social Security benefits from income taxes, $27 billion. For the wealthy, the biggest break involves preferences for capital gains (mainly profits on stocks); in 2004, they're worth $82 billion.

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The Price of Democracy; It Costs Us $100 Billion or More to Do Our Taxes, Because the System Is So Complex. the Trouble Is That Both Political Parties like It That Way
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