Why Complexity Exists in Tax Code

What makes the income tax code (and its regulations) so complex, the root of the problem, is that it is based on the "determination of taxable income" requirement. If a definition of income is required, regulations must go to some length to establish what that final figure is to be.

Here is where the problem begins. Politicians love this tool. One can offer credits against the tax--a twist to the income definition that is "after the fact"--or offer a special deduction, an exemption from taxable income, or even a reduction in the tax rate for certain types of income, also "after the fact" of income determination.

This useful-for-political-purposes feature of a tax based on net taxable income is possibly the major reason, I suspect, that any real change to the method we are taxed in the United States will face very stiff opposition in our Congress. They are the ones who came up with their annual tax law update in 2003, titled the "Tax Simplification Act", which added about 4,000 pages to the already gigantic tax code.

One opposing challenge to simplifying the tax system that is brought up is the fact that the income tax is established in our constitution. Its strange that "we must follow the constitution" fits in well here, but look how loosely it is adhered to on issues involving the First or Second Admendment. The quick answer to the concern about the constitution's claim for continuing the income tax system is this: Congress can reduce the income tax rates to zero! (Until a more permanent solution is worked out, or while a trial run of a new system is made.)

That is the problem, then, of a graduated income tax system--defining income to be taxed, either by exclusion of some types of income, or by myriads of deductions of all sorts. And, finally, all kinds of direct tax credits. Over forty years ago, when I first began to prepare income tax returns, it was sort of "fun", to see the bottom line and figure out ways to make it more acceptable to the taxpayer, to the extent allowable by the code. We could prepare the return easily by hand. Actually, there was basically no other way.

Today, Year 2007 returns will require computer software that is, in itself, quite complex to use for a complex tax return. Investments in oil and gas ventures through a limited partnership arrangement blows my imagination. Its like walking into a jungle full of wild, fierce animals with a bean shooter. The younger generation of tax preparers probably cannot relate to this, but compared to "how it once was", the complexity is immense!

Who knows where it will go from here--unless there is a dramatic change in the way we obtain taxes in this country. And any other method that uses a manner of taxing that requires an intricate definition of the amount to be taxed, or a classification of such, will not be enough. That will require an increased rate of tax to obtain the needed revenues, and will require a monitoring bureaucratic agency equalling the IRS to insure its integrity of operation.

The practical guideline: Expand the base, reduce the rate, and simplify the collection process. Those are the only ways to reduce complexity and decrease the need for a massive Internal Revenue Service.

Gene Lawley