The Other Price of Tax Complexity
Who knew that so many TaxVox readers would stand up in favor of tax complexity?
The other day, I posted on the fact than nearly 90 percent of individual taxpayers have to either pay a professional preparer or buy software to help file their income tax returns. I argued that this was, in effect, a government mandate nearly as onerous as the new, much-reviled, requirement that Americans buy health insurance.
To my amazement, many readers responded that tax complexity is no big deal. Buying software didn’t bother them a bit. Here, from tanstaafl, is a typical response:
I pay someone to fix my car–does that mean that cars are too complex? I pay someone to fix my leaky pipes–is plumbing too complex? I pay someone to fix my shoes–are shoes too complex? I pay someone to cut my hair–is hair too complex? What an absolutely idiotic opinion to hold–that taxes are too complex because middle and upper class Americans must pay someone to help them file.
Now, it is possible that tanstaafl is a tax preparer, or perhaps files a very simple 1040 EZ. But I suspect many people do share this view. And that raises another interesting question: Has relatively cheap software made us indifferent to complexity? Do we no longer care how complicated the Revenue Code is since Turbo Tax is going to do it all for us anyway?
To beat a dead horse, the political economy of all this troubles me. Extreme complexity is not just annoying and somewhat costly. It also makes the tax system more opaque. Voters don’t know who is getting special deals and who is not. For the most part, I believe most of us don’t even know how much we pay in taxes.
Don’t believe me? Try this experiment: Next time you go to a party, ask people how much they paid last year. They may remember their refund, but I’ll bet they won’t know what their total income tax bill was.
Here a bit of more scientific evidence: A CBS/New York Times poll taken in February shows that 77 percent of respondents thought President Obama either raised taxes or kept them the same in his first year in office. In fact, the 2009 stimulus bill (the President’s major tax initiative) cut taxes for 89 percent of tax units and slashed overall taxes by $200 billion dollars in 2009 and 2010.
This ignorance matters. For one, tax rates tend to go up when people are unaware of what they are paying. Amy Finkelstein at MIT did a nice paper on this back in 2007. It can’t be a good thing when we have no idea what we pay in taxes. Uninformed voters are not good for democracy. How can they evaulate tax laws if they can't understand them? And complexity is a major reason why they can't. So, no, paying for tax prep is not like paying someone to fix your car.