The Other Price of Tax Complexity

By :: April 1st, 2010

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.
 

8Comments

  1. Anonymous  ::  11:17 pm on April 1st, 2010:

    Tax complexity to car complexity is a faulty comparison.
    Our actions are, presumably, guided in part by the monetary costs of our actions. For many of us taxes are the single largest expenditure we have. Thus it stands to reason that the rules in the tax code should have a significant bearing on our actions.
    However, if we are unable to accurately determine the tax consequences of our actions (and, in many cases this is very difficult if not impossible), then we are likely making economically irrational decisions.
    There are serious costs associated with this. Accountants, no matter how expensive, cannot always tell us with certainty what will be the tax consequences of our actions.

  2. Anonymous  ::  4:41 pm on April 2nd, 2010:

    The destructive capacity of the IRS
    Wasteful spending: the case against the IRS!
    Read on at: http://bit.ly/docoLQ

  3. Anonymous  ::  4:55 pm on April 2nd, 2010:

    Actually, paying for tax prep is a lot like paying someone to fix your car. If you do not understand how a car works, how can you effectively evaluate a new car when you go to purchase it or whether the mechanic is trying to rip you off when you take it in for a repair. We make blind decisions all the time. We like to hope that unbiased experts will give us some truth as to what we are doing and what we should know.

  4. Anonymous  ::  6:20 pm on April 2nd, 2010:

    Lessening tax complexity is like being a little pregnant. The answer is the kind of tax reform that Len Burman, Michael Graetz and I suggest which has the vast majority of Americans not have to file taxes at all.

  5. Anonymous  ::  4:50 am on April 3rd, 2010:

    This still feels very strained. My wife and I combine for about $300K+/year gross. We pay more for haircuts every year than we pay to file our taxes every year.
    Also this quote is silly: “How can they evaluate 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.”
    First, what on earth makes you think I can't evaluate things like the AMT? Evaluation is often a non-numerical, critical-thinking, contextualizing, and/or remembering activity. I perfectly understand the AMT. I perfectly understand what it does, what it means, its origin, and why it's a problem for me. I just don't want to get the math wrong calculating it!!! So I use some software.
    Now, does this mean I love paying taxes? Of course not. But the 40% or so chunk I see taken out every month in state and federal (ss/medicare/income), in total, bothers me lots more, and makes me worry lots more, than does the complexity of the tax code. Much of the complexity of the tax code, for example in its application to corporations and other entities, does not apply to me anyway.
    Second, the difference between the complex tax code and the complexity of my car, is that I can buy a program that boils the tax code down into something relatively simple. Whereas with my car, I can't do that. With my car I have to rely on individuals to repair it who possess highly variable amounts of scruples. So are they the same? You're right. They're not. The car is much worse!!!

  6. Anonymous  ::  9:03 pm on April 3rd, 2010:

    Simple, fair, high-revenue. Pick any two. You can't have all three.

  7. Anonymous  ::  8:58 pm on April 5th, 2010:

    You can't have all three in a single tax. With three taxes, I believe it is possible – although a Subtraction VAT to fund health care, entitlements and subsidies for families and housing will certainly entail complexity – however it will be complexity that only business owners and large employers will see.

  8. CLARENCE SWINNEY  ::  12:15 pm on May 6th, 2011:

    lowest taxes of rich nations
    largest GDP and Income by far
    33 Rich nations we pay government revue like Mexico.
    Only Turkey-Chile-Mexico pay a lower percent of GDP.

    In 2009 govt took 17.5% of Total Income. In 2010 took 15%.
    14% of GDP.

    Gift To Ultra Rich. We borrowed like freaks to enrich the Rich.

    We taxed at 17.5% of Income in 2009 and it required 31% to PAY OUR WAY.

    What is wrong with us? Uninformed of just dumb as heck?
    NO!Just Deceived by the Ultra Rich who own us.

    Do not repeal Bush Tax Cut for Top 2%!!
    What the devil?
    Top 2% own 50% all Financial Wealth in America.
    Top 2% take 30% of all Income in America.
    They need more???? What the XXXXX? Are we that dumb?

    Folks! We have been suckered since 1980. Big Time.
    Largest redistribution of Income and Wealth in History of Mankind.

    1980–1% had 20% of our Financial Wealth–43% in 2009
    1980-1% got 10% of our Income and 24% in 2009
    2002-2007 that 1% took 67% of all Income Growth

    From a nation of Equality in 1980 to one of most Unequal in 2010.

    We will not recover soon. Takes a very very strong Democratic President and Congress with no connection to Wall Street which now directs our finances.. Up Up Up and away from Middle Class

    comments welcome at cswinney2@triad.rr.com
    prove me wrong with numbers and facts not opinions.
    I will change.
    olduglymeanhonest madmadmad at Inequality in America
    author-Lifeaholic-Best seller in haw river nc population 200 and growing