Financial Times Editorial Comment: Mending America’s broken tax code

Financial Times Editorial Comment: Mending America’s broken tax code
Copyright The Financial Times Limited 2009
Published: April 13 2009 19:16 | Last updated: April 13 2009 19:16
http://www.ft.com/cms/s/0/c3b3e2ba-2856-11de-8dbf-00144feabdc0.html


The approach of tax-filing day on April 15 invariably lowers spirits in the United States. Many taxpayers expect a refund when they have finished their calculations, but even this does little to improve the mood. The system’s surreal complexity is enough to defeat candidates for senior positions in the Treasury, let alone Joe the Plumber. Struggling with it arouses the suspicion that the income tax code is chiefly an instrument of political repression – a reminder of who is in charge.

Ceaseless meddling by Congress has encrusted the tax with extraordinary complications. The code tries to encourage or discourage most things, often both at once. The dozens of tax shelters for savings, for example, overlap in bewildering ways. Nobody seems to understand how the various reliefs interact – least of all the professional tax preparers who handle most of the work – so their incentive effect is, shall we say, muted. All a saver can be sure of is that if he comes to be audited, he will be in trouble.

Just to be sure, there is the Alternative Minimum Tax. This measure, originally aimed at the rich and intended to claw back reliefs such as those just mentioned, was a breakthrough in the battle to demoralise US taxpayers. They must calculate their obligations twice, once using the standard code and again using the entirely different AMT rules. Then they must pay the higher of the two tax obligations. Not only must taxpayers find the money, they must also endure the mockery of politicians who dreamt this up.

The government has provided for a “national taxpayer advocate” – an independent office within the Internal Revenue Service to collect and disseminate data on the code’s absurdities, which Congress and the IRS then ignore. Recent findings estimate compliance costs at 14 per cent of revenue collected – a remarkable sum. In further confirmation that a sadistic sense of humour is at work, returns and their supporting documents invite taxpayers to suggest ways to simplify the forms, pursuant to the Paperwork Reduction Act of 1995.

A little over 20 years since its last comprehensive overhaul, the federal income tax is again a parody of self-defeating confusion. The height of its absurdity is that, hollowed out by exemptions and allowances, it raises so little revenue – barely 8 per cent of national income.

The system thus contrives to be the worst of all worlds. Impenetrable complexity drowns out the economic signals the code is intended to send and drives taxpayers to despair. It militates against fairness, because loopholes abound for those with the means to discover and exploit them. And it erodes the tax base so much that relatively high marginal rates on those with above median earnings succeed in gathering relatively little revenue.

Over the coming years, the US government will need to collect a lot more tax to balance its books. The income tax in its present form is incapable of carrying this burden. New taxes are likely to be needed. Regardless, for the sake of the nation’s sanity, and not just to balance the budget, Congress must reform and simplify the income tax.