The Tax Code Blues

April 8, 2016

The tax filing deadline is upon us, made even more unpleasant by winter’s refusal to leave us alone.

According to the presidential candidates, some people and corporations aren’t paying enough taxes. According to others, some people and corporations are paying too much in taxes. The only thing candidates, non-candidates and the rest of us agree on is the tax code is a complicated mess made ever more so year after year.

The actual tax code runs about 2,600 pages, though even that is not so easy to calibrate.

It starts on page 100, at one point suddenly skips 500 pages and includes other inexplicable idiosyncrasies. So 2,600 pages of actual tax code is a good estimate.

(It is frequently reported by otherwise reliable news sources that the tax code is 70,000 pages. It is not. There is, however, this obscure thing called the CCH Standard Federal Tax Reporter that is that long and it does include the tax code. It also includes legislation for every change made, full court decisions, editorials, articles, and a veritable cornucopia of tax code information. But the actual tax code is a tiny part of it.)

The tax code is a magical mystery tour into mazes within labyrinths within halls of mirrors. Go to three different tax preparers and you’re likely to get three different results, none of them exactly wrong.

Our ongoing frustration with the ever more complicated preparation of returns is one reason it’s rich fodder for politicians. The candidates almost always have a tax reform plan and this year is no exception.

Bernie Sanders believes the super-rich and the regular-rich, Wall Street banks, hedge fund operators, corporations and several others are either not paying their fair share due to loopholes or outright gaming the system. He has a plan to make them all pay more. Lots of people agree with at least some of this, including many who aren’t his supporters.

Hillary Clinton’s approach is sort of Sanders-light, steering clear of increased payroll taxes and the zeal with which Sanders approaches the subject.

Even Donald Trump supports higher taxes for the super-rich. He likes the idea of lower corporate taxes and doesn’t have much to say about everybody else because he doesn't much think about anybody else.

Ted Cruz is the outlier here, proposing to do away with the tax code altogether and impose a personal flat-rate tax with almost no deductions and flat corporate rate with no deductions.

Economists say all of the tax plans suggested will add significantly to annual deficits and the national debt unless accompanied by severe budget cuts of the sort no one is seriously recommending.

It is ironic that politicians, who created every one of the loopholes, exemptions and deductions in the code, are always seeking to fix that which they and their predecessors broke.

The corporate tax rate is an excellent example. The statutory rate of 39.1 percent is the highest in the industrialized world by some margin. If American companies actually paid that much, they would be at a tremendous disadvantage in international markets, not to mention with their shareholders.

Of course, very few corporations pay that much. The effective tax rate, the rate they actually pay, is somewhere between 17 percent and 27 percent, depending on who you want to believe. Not surprisingly, the left and the right have their own numbers.

It's just silly. We’ve created so many special interest loopholes and deductions some enormous corporations earning monster profits pay nothing at all.

Those darned special interests. Like us.

You’ve already completed, or soon will, your taxes. Did you take any deductions? Charitable contributions, out of pocket medical expenses, interest on your mortgage, all those business lunches you paid for... we take advantage of all those loopholes, exemptions, tax credits and deductions too, just on a smaller scale.

One of the reasons meaningful tax code reform is so difficult is because it contains little goodies – and some big goodies – for virtually everyone and every business. Many of its 2,600 pages speak specifically about ways in which taxes can be decreased or eliminated.

We use and justify every deduction we can find. One assumes the super rich and corporations do the same.

So which of those personal and corporate tax breaks should we eliminate? That's where reform meets reality; nobody wants to give up much of anything.

The tax code doesn’t need another "reform." It needs a complete and significantly briefer rewrite simple enough to be understandable, one that starts weeding out the loopholes and breaks. Incessant reforms that offer more complications and confusion won’t help.

If the tax rate is fair we won’t need all those deductions. And if the code needs all those deductions, there is something wrong with the rate.

But 2,600 pages? C’mon.