Caroline Baum: How did tax code get so convoluted?

04/14/2013 12:00 AM

04/12/2013 7:00 PM

It started as 30 words. One hundred years later, it’s almost 4 million.

The 16th Amendment to the Constitution, creating the federal income tax, and the millions of words in the tax code today provide data points marking the evolution of a simple concept into a convoluted reality.

The statistics on the burden imposed by the byzantine tax code get wide circulation every year at this time:

•  Americans spend more than 6.1 billion hours and $168 billion complying with the tax code.
•  Most Americans hire a professional (60 percent) or use tax-preparation software (30 percent).
•  The tax code has had 4,680 changes since 2001, more than one a day.

Everyone complains about its complexity. The Internal Revenue Service’s taxpayer advocate cites it as the No. 1 problem. Politicians seem to agree that the road to tax simplification goes through lower rates and a broader base. Yet all that consensus has yielded precious little progress.

Sen. Max Baucus, D-Mont., and Rep. Dave Camp, R-Mich., chairmen of the Senate and House tax-writing committees, respectively, said in a recent Wall Street Journal commentary that comprehensive tax reform is “alive and doable.” They will seek our input, using social media, in coming weeks. (I’ve got my 140-character plan ready to tweet.)

The two lawmakers already have agreed on “fundamental principles.” Tax reform should level the playing field for families by retaining the code’s progressivity and closing special-interest loopholes. It should help U.S. companies compete globally by lowering the corporate-tax rate and ensuring that they comply. And it should encourage small-business formation and hiring.

Noble goals. Yet one day before the Baucus-Camp commentary appeared, the New York Times ran a front-page expose on lobbying. It seems that as Congress prepares to rewrite the U.S. tax code, former Baucus staffers are in hot demand. The Times analysis found that at least 28 aides who have worked for Baucus since he became the committee chairman in 2001 have lobbied on tax issues during the Obama administration.

Chief executive officers of some of the largest U.S. corporations join hands to “Fix the Debt” by day, while at night they pay lobbyists lots of money to look after their interests in Congress.

How exactly did we get from the introduction of the income tax on Feb. 3, 1913, to $1.1 trillion of annual tax expenditures, which are government spending by another name minus the transparency?

“The short answer is, there have always been preferences,” said Joseph Thorndike, director of the tax history project at Tax Analysts. “From the start, there was a deduction for interest paid. It was intended to be a business deduction – a cost of doing business – but people with mortgages started to deduct interest.”

The charitable deduction was introduced in 1917 “to make the world safe for philanthropy,” he said. Then came the preferential treatment of dividends and capital gains, the oil- and gas-depletion allowances, adjustments for coal and timber royalties, and so on. All of these carve-outs violate the principle of tax fairness: the idea that people with the same income should pay the same tax rate (not to be confused with President Obama’s definition).

The real impetus for tax breaks came in the 1950s. Congress realized the top marginal rate of 91 percent was a political liability, so lawmakers crafted exemptions to make the rates easier to swallow. Pretty soon they realized the benefit of rewarding constituents in terms of fostering lifetime employment.

Yet here we are, talking (dreaming?) once again of comprehensive tax reform that creates proper incentives to work and save, simplifies our lives, removes inefficiencies and boosts the economy. I don’t want to be disappointed again.

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