Posted by: SWL | April 17, 2012

Congress: Please Reform Complicated, Time-Consuming Federal Tax Code

Happy Tax Day!!!

I am becoming more and more a fan of some type of flat tax with very limited deductions, and never more so than right after finishing the family tax forms each April. The only down side I can see is an epidemic of unemployment among tax preparers if the tax code is simplified enough for Americans to fill out their own forms.

My family’s income includes regular salary, wages from officiating high school sports, earnings from hand-crafting gift items and a measly amount of interest from bank accounts. (The squelching if interest rates by the Fed would make a good topic for a future post.) To report this to the IRS took 6 different forms and over 10 hours of sorting the information and getting it in the right places.

I appreciate the IRS saving money by not sending out forms and instruction booklets. I also appreciate saving trees. But finding what you need on the IRS website and printing it takes more time than using the instruction booklet. And the instructions have three columns per page, the same as the printed instructions – trying to read those on a computer screen is frustrating, scrolling down and back up twice to read a page and then back down to get to the next page.

I wonder how long it took to write even one section of the tax code and the instruction for filling out the forms. To calculate the self-employment tax for a small business, the owner must multiply income by 92.35%, then multiply by 13.3% if under $106,800, or if over you multiply by 2.9% then add $11,107.20. Why does it need to be so complicated? And who came up with these numbers? (What is the 20 cents for?)

President Obama’s mantra is that millionaires need to pay more taxes. But the Alternative Minimum Tax (AMT) is hitting more middle income Americans each year. This year it was those with income over $74,400. Or so they say. We have been tentatively filling in the worksheet for a few years, because nowhere does it say if that income is adjusted gross income (1040, line 38) or taxable income (after deductions and exemptions). I must say I was pleased to see that the worksheet had been simplified this year. It takes 28 lines to determine the total income that might be subject to the AMT, but you just fill in the numbers, which are mostly zeros for ordinary middle income people. In the past there was a lot of math that was even more cryptic than what I described in the previous paragraph. (And so far, we have not had to pay the AMT, which would require another form and more time.)

Instead of putting a so-called “patch” on the AMT each year, Congress needs to permanently change the regulations to exclude all but higher incomes, as originally intended. But more comprehensive tax reform is needed. Passing the “Buffett Rule” would be a step in the wrong direction because it only creates another subcategory of taxpayers, adding more complexity to the tax code. Tax reform will be a huge effort. But the Bowles-Simpson Debt Commission has already done much of the research and made some recommendations. Different sections of the tax code (business, deductions, investments, etc.) should be delegated to experts in that field who have no special interests or political associations with Congress or the President. They can research ways to simplify the tax code and the ramifications of any changes.

I believe that dealing with the federal debt and budget is a much larger and more important problem than the complicated tax code, and must be addressed immediately. It would be almost impossible for Congress to deal with both problems at the same time. But tax reform would have a major impact on government income, and hence the budget. So it would make sense to initiate tax reforms just before or right after budget reforms. Of course, many actions taken (or not taken) by Congress do not make sense, so I am not sure there is any hope of even minor tax relief in my lifetime.

(I would like to hear if others need as much time to file taxes as I do. Share your tax experience in the comment section.)



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