(Antony Davies, American Institute for Economic Research) Each year, Americans pay tax preparers billions of dollars to file our taxes. Though 70 percent of us qualify to file our taxes for free, few of us do. Part of the reason is that the tax code has become so convoluted, and the ramifications of erring so onerous, that tax preparers have become almost a priestly class of intercessors between the IRS and taxpayers. We dare not risk the wrath of the IRS by approaching it without an advocate.
And yet, most of us are simply reporting numbers that the IRS already has. How do we know? Because if we report the numbers incorrectly, the IRS will tell us so. For many of us, filing our taxes is not about reporting our incomes so much as providing the IRS with free secretarial support.
While a dangerous pain to taxpayers, the cesspool of confusion, inefficiency, and manipulation that is the federal tax code won’t be simplified, because the code delivers a cornucopia of benefits to lawyers, tax accountants, favored industries, lobbyists, and politicians.
The benefits to lawyers and tax preparation services are obvious. The IRS estimates that the average taxpayer spends $240 just to file his federal tax return. For 158 million federal tax returns, the annual cost of complying with our byzantine code approaches $40 billion. But in most cases, the tax code is a make-work program. Congress digs legal holes, and we pay lawyers and accountants billions of dollars annually to fill them back in again.
Favored industries and lobbyists benefit more subtly. The more intricate the tax code, the easier it is for politicians to hand out favors to their preferred groups without attracting attention.
Granting special tax treatment to a favored industry is as simple as hiding a needle composed of a few choice sentences in a 70,000-page haystack. Industries pay lobbyists to encourage politicians to hide these needles away from public view, and the politicians receive political and financial support from the industries in return. This symbiotic relationship among favored industries, lobbyists, and politicians thrives in an environment of complexity.
Meanwhile, complexity benefits the politicians both coming and going. While politicians receive support from industries by hiding gifts in the tax code, come election season, politicians decry the tax code and promise voters they’ll fight the complexity on the voters’ behalf. Politicians vilify corporations, promising to close tax “loopholes” that benefit the rich and powerful, while counting on voters not to notice that those same politicians created the loopholes in the first place. Politicians pledge to tax corporations, while counting on voters not to notice that every tax on a corporation gets passed on to voters in the form of higher prices, lower wages, or lesser returns. Politicians vow to make the rich pay their fair share, while counting on voters not to notice that the richest 10 percent of taxpayers already pay almost 75 percent of all federal income taxes.
Politicians create the problem of a complex tax code and then present themselves to voters as its solution.
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The tax code’s complexity has created an environment in which tax-preparation services, lobbyists, favored industries, and politicians thrive, while taxpayers struggle to make sense of ever-changing rules and regulations.
