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Why Politicians Like The Current Tax Code

As America’s taxpayers complete their federal tax returns today, they may wonder why completing IRS Form 1040 has to be so difficult, or why the tax system is so complicated. In his RealClearMarkets column today, Steven Malanga, a senior fellow at the Manhattan Institute, explains it this way:

“Because legislators of all stripes like the code the way they now use it. They have turned it into an agent of cultural change which they employ to make political promises and payoffs, in the process making simplification unattractive to them and the tax code ever more painful to us.”

Discussing complexity in more detail, Malanga writes:

“About the complexity of the code there is little debate. In a recent Wall Street Journal opinion piece Nina Olson, the IRS’s taxpayer advocate, noted that 80 percent of all filers now require some help, either using paid tax preparers or software, to complete their forms, and as a country we spend (waste) an extraordinary 7.6 billion hours on tax compliance, which now costs us nearly $200 billion annually. So complex is the system that it’s becoming increasingly difficult to judge whether inaccuracies on forms are intentional efforts to cheat or legitimate errors. Even the percentage of forms signed by paid preparers which have mistakes on them is growing rapidly, something that should be a source of embarrassment and concern to the profession.

“What’s worse is that we’re going in the opposite direction from the rest of the world. A survey of the 30 member nations of the Organisation for Economic Co-Operation and Development found that most enacted some type of simplification of their tax systems in the current decade. We haven’t simplified ours in 23 years. That’s one reason why another study ranked the U.S. as 122nd in tax complexity out of 175 nations.”

He explains that a “problem with complexity is the cost of unintended consequences in a system where change is so common,” and explains why this way:

“Exhibit A is the Alternative Minimum Tax, enacted in 1969 to target 155 high-income filers whom news reports said were benefiting from huge deductions. The original AMT raised just $122 million in income (the equivalent of $671 million today) by capping the value of certain deductions, according to the Tax Policy Center. But because the AMT was not indexed to inflation and has progressively applied to more and more taxpayers, some 3.8 million filers now must pay it, to the tune of $30 billion. In two years, that sum is projected to rise to $100 billion. The AMT has grown so large that Washington can no longer afford simply to repeal it, even though it was never designed to operate as it now does.”

Malanga closes his essay saying, “There’s only one reason not to change the system. The pols love it.”

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