Why Are Taxes So Complicated? and What Can We Do about It?
Gale, William, Brookings Review
The time, money, and aggravation that tens of millions of Americans expend to understand and comply with the income tax is, it turns out, nothing new. In his 1776 The Wealth of Nations, Adam Smith noted that "subjecting the people to the frequent visits and the odious examination of the tax gatherers ... may expose them to much unnecessary trouble, vexation, and oppression: and though vexation is not, strictly speaking, expence, it is certainly equivalent to expence at which every man would be willing to redeem himself from it." For Americans today, the "expence" includes maintaining records, learning the law, preparing the return or hiring a preparer, corresponding with the IRS, and learning how to reduce (or cheat on) taxes.
How Bad Is It?
For low-income households, headaches can arise from issues regarding filing status, abandoned spouses, dependency tests, the child and dependent care tax credit, and the earned income tax credit. For individuals with higher income, complexity arises in itemizing deductions, the treatment of capital income (particularly capital gains, interest deductions, and passive losses), and the alternative minimum tax. For small business owners, issues relating to inventory, depreciation, and distinguishing various expenses can be complicated. For large corporations, tax complexity is centered on depreciation, international income, the alternative minimum tax, and coordinating with state taxes. In addition, large firms are almost continually audited; one tax expert has described the basic corporate tax return as nothing more than an "opening bid."
Stories of income tax complexity are legion. The internal revenue code contains more than five million words. In Money Magazine's recent surveys, every one of 40 to 50 tax preparers came up with a different estimate of the tax liability due on a complex, hypothetical return. The share of taxpayers who pay tax professionals to complete their tax returns rose from 42 percent in 1981 to 51 percent in 1997.
Yet the costs can easily be overblown or distorted. For many people, the tax system is not that complicated. Almost 40 percent file simplified 1040A or 1040EZ forms, and about 18 percent file the 1040 but have no itemized deductions or business income. Many people go to preparers to expedite refunds or because they prefer to spend their time on other things rather than on preparing taxes. Marsha Blumenthal and Joel Slemrod found that while the average taxpayer spent 27.4 hours on filing income tax returns and related activities, 30 percent spent less than 5 hours, and another 15 percent spent between 5 and 10 hours. About 11 percent spent 50-100 …
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Publication information: Article title: Why Are Taxes So Complicated? and What Can We Do about It?. Contributors: Gale, William - Author. Magazine title: Brookings Review. Volume: 17. Issue: 1 Publication date: Winter 1999. Page number: 36. © 1999 Brookings Institution. COPYRIGHT 1999 Gale Group.
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