Here is how you really simplify taxes

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In an earlier post from January 9, I noted how the most recent change to the U. S. tax code makes compliance more complex, not less, for many taxpayers, and certainly for businesses. In this post, I will lay out some opportunities for truly reducing tax complexity.

For the vast majority of ordinary taxpayers, the “quick-hit” route to simplification is obvious. Many experts have written about how the IRS could easily pre-print tax forms for millions of Americans from the information they already have on file for you, and will no doubt be used to verify your submission. You would then have the option of accepting the IRS calculation, or re-calculating the numbers on your own.

Just this change would give many taxpayers, annually at the mercy of commercial preparers, a “tax reduction” from eliminating fees sometimes as big as what they receive from the recent tax changes.

But this will not happen soon without a major overhaul of Congress, and it is not even an issue of which political party is in control. The financial hold that the tax preparation industry has on Congress, despite the potential time and monetary savings to literally millions of taxpayers, is perhaps the most easy-to-document example of “appearance of corruption” in government today. If your member of Congress does not support this first path to simplification, you now know why.

An often-touted path to simplification comes from the advocates of the “flat tax.” I will address this in a later post, but suffice it to say that, among numerous of flaws in logic and unintended consequences, this proposal would aggravate an already-worsening problem with rising income inequality in the U. S.

Reducing the mathematical complexity

There is another long-term solution. Tax compliance is a problem of basic mathematical complexity, created by every alternative calculation, every required form (including forms needed to make calculations but with no net effect on your taxes), every new obscure deduction, and every new tax credit. Add to this each different way in which income itself is defined and adjusted, from wages to investments to business income, and we have a mess of a tax code, with far too many “decision nodes.” Until these are reduced in number, the problem only gets worse.

Most of these rules, calculations, deductions, credits and forms are not required of most taxpayers, and will have no final impact on taxes owed, but nonetheless need to be considered and evaluated in completing the taxes for millions of people. They need to be part of each new edition of commercial tax software created, and either that software or your tax professional will need to quiz you to evaluate the impact of these rules in your particular case.

The IRS either knows or can easily determine the percentage of taxpayers who encounter any one of these “decision nodes,” yet who find it does not affect their taxes owed in one direction or the other. Hundreds of these nodes impact less than one business or personal taxpayer in one-thousand filers or worse.

At that low probability of impact, these are truly “special interest” tax provisions, and were most often written by an anonymous corporate lobbyist, and inserted into the tax code without a hearing, via a quiet submission, in cryptic language, to a poorly-attended sub-committee by a “friendly” member of Congress. Everybody has a reason why their own tax situation is “special,” but a small number of people and businesses are “more special” than others. And yet your taxes are far more complex than they need to be as a result.

Changing this mindset requires a major rise in awareness of the costly inequality perpetuated here. Sanitation workers and child care workers wade through far more crap to generate their income than any hedge fund manager, but the hedge fund manager gets the break. We need to start with the assumption that “your income is not more special than someone else’s”

There is inherent congressional corruption in this “exception for me but not for thee” process, so normal legislative processes will only make this problem worse, as we have seen with the most recent tax act. But thankfully, there is a model by which Congress has dealt with a similar problem in the past.

A “Tax Realignment and Closure Commission” 

So, my solution? At several points since the 1980s, Congress has realized that certain military bases around the U.S. and the world have needed to close to get budgets and readiness under control, yet they did not have the collective political will to make these decisions. In at least six instances, this has resulted in the appointment of a multi-party, multi-interest “Base Realignment and Closure Commission” which would group recommendations together, to be voted up or down only as a whole, thus spreading the heat of local political opposition. The most recent of these commissions in 2005 impacted over twenty military installations.

I propose a similar “Tax Realignment and Closure Commission” that would mark for sunset all IRS-identified rules that impact a small subset of individual or corporate taxpayers, say starting with one in 5000 as the first set, and working down from there. These could be analyzed for essential exceptions and presented to the President and Congress for approval or rejection as a whole. Depending on the political will and public support, this should go all the way down to one in 1000 taxpayers or lower.

I suggest that this is likely the only way, given our current political system, in which to reduce the number of “decision nodes” in the tax code. This would have the largely-invisible, but critical, effect of eliminating thousands of pages of tax code, thousands of lines of computer code, hundreds of pieces of required data, numerous inequities, unseen bugs, and even entire forms. Tax compliance would then become both simpler and less error-prone, save millions of dollars of compliance time and cost, and bring perhaps billions of additional dollars to the federal coffers.

Ideally, this process would continue throwing out special-interest exceptions in the true interests of serving the vast majority of citizen-taxpayers.

If you like this approach to tax reform, send a link to this post to your friends, your members of Congress, and favorite candidates running for office. There is hope, but Congress needs to buy into the process. It requires two very simple actions, one to direct the IRS to test pre-populated forms, and the second to set up a bipartisan “Tax Realignment and Closure Commission” with an initial target.