How difficult will it be to overhaul the American tax system? Listening to politicians during political campaigns, voters must get the idea that a new tax code is just around the corner. Candidates from both parties regularly bemoan the incredibly arcane and often ludicrous federal income-tax system, which seems designed to create criminals rather than collect a rational share of revenue for the federal government. Both Barack Obama and John McCain insisted during the presidential campaign that the tax system needed to be replaced, so voters could understandably have concluded that electing either one of them would get that result.
Certainly, the existing system does not enjoy much popularity, and for good reason. The tax code has grown so complex that Americans spent more than $250 billion for tax preparation last year, and 60% of all individual tax returns were prepared by professional services. Further, a GAO report notes that the additional costs of compliance with the existing system ranges from $200 billion to $600 billion, which would be twice as much as we pay the preparers.
But why is the tax code so burdensome? Politicians have used the tax code as their primary tool in social engineering. Democrats and Republicans, liberals and conservatives – all have added their pet projects and causes to the tax code in order to affect taxpayer behavior in some manner. In April, Newsweek found a few examples of particularly strange deductions:
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- Whalers in Alaska can deduct up to $10,000 for maintenance to their boats. This must not make Greenpeace very happy, but it endeared Senator Ted Stevens (R) to his Alaskan constituents in 2004.
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- Non-citizens who win big while gambling on races in the US do not have to declare their income here. Who benefits from that? Mainly horse- and dog-racing tracks, which is why Kentucky Senators Jim Bunning and Mitch McConnell (Rs) got it inserted into the tax code.
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- Normally, income from copyrighted material gets taxed as income, but songwriters – assisted by the Nashville Songwriters Association – only have to pay capital-gains taxes, which caps out at 15% (at least for now).
Earlier this week, I wrote about a new effort from a well-known conservative Congressman who wants to create a tax deduction for pet expenses. It gives an entirely new and ridiculous meaning to the phrase “pet project,” and its name – the Humanity and Pets Partnered Through the Years (“HAPPY”) Act – doesn't help make it sound any more serious. The bill proposes to reduce taxes to those taxpayers who have pets, and it's explicitly designed to encourage pet adoption, yet another example of social engineering by the federal government.
Consider the enforcement and verification implications of the HAPPY Act. The IRS will have to create new forms, which will then have to be reviewed by IRS auditors. Taxpayers will have to keep entirely new categories of records, including pet identification. Will we have to issue Social Security numbers for Spot and Whiskers, too? Costs of compliance will rise even further – and thanks to the demand that tax breaks will create, costs of pet supplies and veterinary services will also increase.
Now let's consider the philosophical argument of whether some taxpayers should provide a de facto subsidy for others who own pets. Each deduction, after all, means lost potential revenue which needs to be recovered from somewhere else. Deductions for children and for mortgage interest are supported because people believe that home ownership and procreation serve important social good in America. What intrinsic social good gets served by horse racing, whaling ships, and sales of songs? Or, for that matter, Spot and Whiskers?
This shows the difficulty of eliminating the present tax code and replacing it with something simpler. Too many people have stakes in the existing deductions. Homeowners will shriek if the mortgage interest deduction disappears, and parents will burn the phone lines if Congress eliminates their deductions for their offspring. The more deductions that get offered, the more stakeholders they create in the status quo. And let's not forget that tax preparation industry, which would stand to lose hundreds of billions in a simplified system.
However, if those stakeholders were the only problem, Congress could probably sell an overhaul. As much as those deductions mean to taxpayers, a simplified system would mean more – in efficiency, in economic growth, and most importantly in individual liberty. An IRS in such a system would work as a simple collection agency, not an invasive, pervasive presence in our lives, giving the government access to information it should have no business accessing. Taxpayers would certainly want that.
Unfortunately, as the HAPPY Act and the other deductions show, Congress is the biggest obstacle to real reform. The existing tax code perfectly suits their purposes. It gives them the power to tinker with the choices made by Americans, from pet ownership to home ownership, and from procreation to fishing tackle. It also gives Congress an inordinate amount of power to pick winners and losers in the marketplace through tax incentives and penalties. In short, the existing tax code gives Congress far too much power for a legislature in a free society.
If candidates and political parties want to pursue tax reform, they have to attack the system itself. Pushing bills like the HAPPY Act compound the problem, as does nibbling at the edges by closing a few deductions and loopholes. As long as Congress has this kind of tax code with which to build power bases, the tax system will careen towards the Byzantine at the speed of cash.
Edward Morrissey's Bio
Ed Morrissey writes for Hot Air, where he also has a daily political talk show. Ed has written for the Washington Post, the New York Post, the New York Sun, and has made numerous television and radio appearances. He lives in Minnesota with his wife, son, and two granddaughters.
Posted
10-01-2009 1:01 AM
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