Why Is the Tax Code so Complicated

The Affordable Care Act has become a nightmare for tax returns, but so have other parts of the code, such as the earned income tax credit. The IRS Income Tax Credit Guide is 37 pages long and the rules are so complicated that the credit error rate is 27%, according to the IRS. That`s $18 billion in mistakes every year, just for this loan alone. The code also levies a tax on donations, but provides an annual exemption of $15,000 for donations to a single recipient. Generally, no actual tax on donations is payable as long as the total amount of donations from a transferor that exceeds the annual exemption limit exceeds the lifetime exemption of $12.06 million in 2022 ($11.7 million in 2021). Just over half of Americans didn`t like or hated the idea of paying their taxes because of the complicated paperwork and inconvenience, or hated it, according to a 2013 Pew Research Center poll. Taxpayers had the same level of hostility when the organization surveyed taxpayers two years later. In recent years, we have seen enough changes in tax law for a lifetime. From the Tax Cuts and Jobs Act to the CARES Act, it seems that taxes are becoming more and more complicated. I swear that with each passing year, I learn new applications and new forms that customers have to fill out.

But why does it have to be so? The tax preparation industry makes money from complexity – One of the main theories underlying the complexity of tax law is the influence of lobbyists in the tax preparation industry. The theory is that large companies like TurboTax and H&R Block have the most to lose from simple tax legislation. Imagine the loss of revenue for these businesses when taxpayers can automatically file their tax returns with ease. John: Let me ask you, don`t we like the deductions we get through the tax code – like mortgage interest? Aren`t the Americans a little complicit in the complexity of our tax legislation? 2. Undermines financial planning. For families, tax legislation makes it difficult to make decisions about retirement provision, payment for education and other life events. For businesses, the tax implications of hiring workers, investing in capital goods, and other decisions are constantly changing as new laws and regulations are passed. The IRS Taxpayer Advocate counted 4,428 changes to federal tax regulations over a 10-year period. In the presidential election campaign, the candidates seem to be very far apart when it comes to tax policy. Democrats are in favor of tax increases for high incomes, and Republicans are in favor of tax cuts all around.

But as voters currently struggle to file tax returns, all candidates should be grappling with the frightening complexity of tax legislation. The problem is getting worse and worse. Federal tax regulations are now about 75,000 pages long, three times more than when President Jimmy Carter called the code a “disgrace to humanity.” The problem is that Congress is micromanaging us with more and more tax credits, deductions, and exemptions for education, energy, health care, savings, labor, and other activities. And the simplification of tax legislation is supposed to have bipartisan support. Both the Bush and Obama administrations reportedly advocated simplification, as did House Speaker Paul Ryan (Wisconsin Republican) and Senator Elizabeth Warren (Massachusetts Democrat). But when the Senate passed a tax bill last December, there was no postcard. Instead, Democrats pointed to the handwritten notes on the sidelines of the bill as a sign of a crazy construction process. Proposals to reduce deductions for mortgages and medical expenses, as well as tax credits for adoption and education, have met with opposition. “Submit your taxes on a postcard? A promise from the GOP marked unattainability,” a New York Times headline reported just before President Trump signed the bill. The National Taxpayer Advocate`s annual reports have put forward proposals to simplify tax legislation, including reforms to education incentives, pension incentives, family allowances and the alternative minimum tax. Finally, this third theory attributes the complexity of tax legislation to large corporations that hire expensive tax lawyers to circumvent the rules in order to avoid paying taxes.

To prevent these companies from circumventing the rules, Congress must intervene from time to time to take action against these tax havens. After a few decades of playing cat and mouse, you can imagine the mess we caused. Taxpayer satisfaction and compliance with the tax system depend on their perception that tax legislation prescribes a sufficient level of tax revenue – and collects the authorities – to support the current state budget and investments for the future, and that all taxpayers pay their fair share. Andrea: Yes, two reasons why U.S. tax returns are so complicated: (1) We do a lot of social policy through “tax expenditures,” and (2) we tax households rather than individuals. For any incentive, you need rules, exceptions to the rules, restrictions, and administrative advice to help taxpayers navigate tax law. The more incentives you incorporate into the code, the more complex you make the tax code and the more you have to verify inadmissible claims or fraud among government employees. Reagan began his campaign for tax reform with a passionate speech to the nation in May 1985: “We must. Transform a system that has become an endless source of confusion and resentment into a clear, simple, and fair system for all — a tax code that no longer tramples on Main Street America, but provides your families and businesses with incentives and rewards for hard work and risk-taking in a high-growth American future. “As with any game, if you don`t have a rule against a particular action, you assume it`s not a violation of the rules. Much of the tax legislation is to manage transactions and reporting scenarios when the code is tacit. What makes the code so convoluted? As Auerbach notes, policymakers have begun using tax breaks to encourage employers to hire (or at least not lay off) more people, buy equipment, and invest in job creation.

They use other breaks to get people to pursue education that would increase their wages, borrow money to buy a house, and send their children to daycare while parents work. If these incentives work as intended, more money will be pumped into the economy through higher wages and spending, generating more funds for the U.S. Treasury at tax time. Fortunately, some presidential candidates are promising to simplify tax legislation. It will be a challenge because members of Congress like to add tight breaks. The number of “tax expenditures,” that is, official income tax interruptions, has increased from 125 in the 1990s to about 200 today, according to the Joint Tax Committee. .