Failure to Comply

This entry continues the series exploring ideas for improvements to our federal tax system.

The previous entry touched on the immensity of the federal tax code. That it was 16,485 pages in March of 2006 (by now it is longer) is astonishing in and of itself, but it is not just its length that makes it so ridiculous.

The complexity of the code is the real issue. As noted in the previous entry, Americans spend $265 billion on compliance costs in 2005. Federal tax revenue was around $1.2 trillion. That means that 22% extra was spent on complying with the tax code. So the real cost of taxes is much higher than the number on a tax return.

It is not just business paying for the absurdly high compliance costs. As consumers and employees, businesses pass expenses along to us anyway--but individuals totaled 44% of the $265 billion spent on compliance in 2005. Stack on top of that an average of 25 hours spent working on compliance, and it is easy to see that the government should actually be paying us to determine what it costs to pay our taxes.

And it is not just inefficient for the taxpayers. The government wastes vast amounts of time and resources on compliance. But because tax codes are so complex and so vast, even Uncle Sam has a hard time getting it right.

Here's a true story to support my case. While it concerns state taxes, it demonstrates the absurdity of our tax laws. Last year, after sending my state tax return, I received a letter indicating that I owed another $42 in taxes. There was no explanation for this assessment, just a dollar figure and a date. Since I do my own taxes, I went back and reviewed my information, and checked it again with the tax software I used to compute taxes. According to my hand calculation and the software, I had paid the correct amount.

I decided to send a letter explaining why I believed I did not owe another $42 in taxes, and included copies of my federal and state returns. Several weeks later, I received another bill, this time for $43.71, because I now owed interest on my late payment. Thinking it best to cut my losses and pay the state, I sent my check for the full amount.

Two weeks later, the state must have finally figured out that my calculations were correct, because they sent me a check back for just over $44--the amount I paid plus the interest they owed me.

I would like to think that this is rare occurrence, but because my tax return was relatively uncomplicated, the only logical conclusion is that these things happen frequently.

So who benefits from this mess of a tax code? The wealthy lawyers and accountants who earn their living helping the rest of us comply with the system. Furthermore, the wealthiest Americans are able to take advantage of all the loopholes and end-up paying a lower percentage than middle-class Americans.

This must stop. Two people with the same income should pay the same in taxes. It should not be the better accountant or lawyer who determines what we owe the government. In this age of instant information, we ought to be able to look at a simple form a the end of the year, sign our name, and write our check or receive or refund. There should not be 40-plus page tax returns, forms with more abbreviations than anyone can remember, or huge governmental organizations spending millions of tax dollars on trying to figure out if each citizen is actually paying what they owe.

It is time to streamline the system and the process. The government benefits from the mystery of the tax code--most of us do not realize how or how much we actually pay--and it allows them to perpetuate the failing programs and offices that put more dollars into politicians' pockets.

Americans deserve a tax code that is simple, fair, logical, and requires the government to demonstrate fiscal restraint.