A shortened version of this article, written by Peter Kennedy, Director, can be found in May 30th edition of The Delaware Business Times
I get 500 words to write these articles and so I have to hand it to President Trump, he managed to issue his statement on tax reform using only 229. The brevity of the President’s memo belies the complexity of the topic. There is one thing EVERYONE seems to agree on, including the IRS itself – the current tax code is too complex. It all depends on who you believe, but the consensus is that there are over 70,000 pages to the Federal Tax Code, including regulations and interpretations. It is a sign of the complexity of the code that there is a significant amount of disagreement over exactly how many pages are in it. At 500 words per page, that would make the code approximately 35 million words long.
No single person can possibly claim to understand it all. How can paying income tax be considered a “tax preference item” for Alternative Minimum Tax purposes? As my son would say; smh.
A few of points of reference:
If you could summon yourself to read 100 pages of tax code per day it would take you almost two years to finish.
U.S. Constitution with all 27 amendments and signatures = 7,591 words – there are approximately 9 pages of tax code for every word in the Constitution.
A large acorn (average weight 13.7 grams) planted 104 years ago could today be 80 feet tall, have a 24 inch diameter and weigh 20,000 pounds – 662,774 times its original weight. But it’s got nothing on the tax code….
The 16th Amendment (allowing the Federal Government to levy income tax) started at 30 words in 1913. The Federal Tax Code has now been estimated at 35 million words – almost 1.2 million times its original size.
The National Taxpayer Advocate’s Office (a branch of the IRS which pleads for a simplified tax code each year in its annual report) estimated in 2016 that over 6 Billion hours are spent annually complying with the Federal Tax Code. The Taxpayer Advocate also stated that since 2001, the tax code has changed 5,900 times; an average more than once per day.
But if the tax code is simplified, what will all the accountants do? 6 Billion hours = 3 Million full-time accountants. I’m not sure but it’s often bothered me – I’ve met many very smart and talented people who expend their brilliance on tax compliance. What if the person who could have been the next Nikola Tesla or Thomas Edison is currently working in profitable anonymity on advanced tax strategies for a large conglomerate somewhere – stretching and expanding arcane concepts within the tax code rather than the laws of nature.
A simple code is a more enforceable code. The “Tax Gap” (the difference between tax owed and tax collected) has been estimated at 20% of total income tax the last time anyone bothered to check. If people can figure out their own tax situation, they are far more likely to comply. There is no data or estimate available on how much of the tax gap is due to ignorance of the tax code due to its complexity, but it stands to reason that the more people understand their tax obligations, the more people can see that others are paying their fair share and the easier it is to recognize and catch the cheaters, the tax gap will shrink.
But for each of those 5,900 changes and all the others that have accumulated over time, there is a reason. They represent the blood, sweat and lobbying dollars of some constituency, somewhere. Taking away tax breaks is great….until they come after the one you use. A true simplification of the tax code would require the slaughtering of sacred cows on a scale not seen in recent history. It is not clear that our elected representatives have the stomach for it, we can only hope.