It’s that time of year again. As always, I’ve been procrastinating about doing my tax returns. I hate having to keep track of all the little slips of paper, extract the necessary information, and get it all down on specific forms from the Internal Revenue Service. And I teach tax law for a living! How about you?
According to Nina Olson, the National Taxpayer Advocate, Americans spend over 6 billion hours per year trying to comply with tax filing requirements. That’s the equivalent of 3 million full-time workers doing nothing but tax compliance, which makes “tax compliance” one of the largest industries in America.
The majority of individual taxpayers, about 60%, find the job so distasteful that they hire someone else to do it for them. And an additional 29% find it necessary to purchase computer software in order to do the job themselves. The monetary cost to the median individual taxpayer (based on income) is more than $250 per year.
And despite this herculean effort, honest taxpayers make mistakes resulting in overpayment of tax or IRS enforcement actions for underpayment. Sophisticated taxpayers find loopholes to reduce their tax liability, resulting in widespread cynicism among all taxpayers, and reduced voluntary compliance.
Nina Olson herself came to Temple Law School this week to discuss these problems. She was a fine arts major at Bryn Mawr who started preparing tax returns to earn money, then went to law school at night, and then founded a low-income taxpayer clinic. In 1998 she testified to Congress about the problems of low-income taxpayers. In response to her testimony Congress created a grant program for low-income taxpayer clinics and created the position of National Taxpayer Advocate within the IRS, which Olson was appointed to in 2001.
Nina Olson says the Number One problem afflicting taxpayers is the complexity of the tax system. The solution is tax reform which simplifies the system by reducing the number of deductions and exclusions from income in exchange for lower tax rates on income. This can be done in a way which is tax-neutral for average taxpayers in every income bracket.
But tax simplification is very difficult to do because every line of the Internal Revenue Code has vested interests and lobbyists in Washington defending it. The real estate industry and the health insurance industry will campaign hard against removal of the home mortgage interest deduction and the exclusion of employer-provided health insurance from gross income, even in a tax-neutral reform of the tax law.
The political gridlock in Congress makes tax reform and simplification appear to be impossible. But National Taxpayer Advocate Nina Olson says that tax reform not only must happen but will happen. It will happen because there is no alternative. The inefficiencies in the current tax system are making the U.S. economy uncompetitive in the world marketplace. She cites the historic Tax Reform of 1986, which dramatically simplified the tax system, as showing that tax reform always seems impossible until it actually happens.
True. But since 1986, opportunistic politicians have continued to manipulate the tax system for their short-term political advantage, resulting in the complexity we must face today. So in a democracy there is never permanent victory in the fight for a simple and transparent tax system with easy and inexpensive taxpayer compliance.