DON’T MESS WITH TAXES

A cen­tury of in­come tax.

Forbes - - CONTENTS - Wil­liam Bald­win was the ed­i­tor of Forbes from 1999 to 2010.

It was just a nib­ble when the fed­eral in­come tax started in 1913. The first 1040 had seven brack­ets, rang­ing from 1% to 7%. It raised $28 mil­lion, a bit less than a dol­lar per em­ployed cit­i­zen. The in­struc­tions were a page long. To­day, when we look out at the busi­ness of col­lect­ing in­come tax, we see a mighty in­dus­try. It em­ploys CPAS, lawyers, book­keep­ers, Tur­b­o­tax coders, col­lec­tors, en­rolled agents, con­gres­sional staffers, pon­tif­i­caters and of course jour­nal­ists. No doubt some lucky per­son was hired to re­place that IRS ethics lawyer dis­barred in 2015 for dis­hon­esty. And lob­by­ists get hired to pro­tect the fa­voritism ac­corded, from the ear­li­est days, to real es­tate and in­sur­ance. Tay­lor Swift once got a job per­form­ing at a fundraiser for Kevin Brady, chair­man of the House Ways & Means Com­mit­tee.

Yet other fed­eral em­ploy­ees can be thank­ful that we don’t have a flat tax— par­tic­u­larly the ones who cal­cu­lated, as re­quired un­der the Pa­per­work Re­duc­tion Act, that a tax­payer claim­ing the Em­pow­er­ment Zone Em­ploy­ment Credit will need 2 hours and 22 min­utes to learn about Form 8844 and 2 hours and 33 min­utes to fill in the num­bers.

The Tax Foun­da­tion es­ti­mates that Amer­i­cans spend 8.9 bil­lion hours a year on taxes, the equiv­a­lent of 5 mil­lion full-time jobs. Do get that em­pow­er­ment credit right. You must ap­ply it af­ter the In­dian coal pro­duc­tion credit and be­fore the al­ter­na­tive fuel ve­hi­cle re­fu­el­ing prop­erty credit.

To help out, the IRS has 2,113 forms and ex­plana­tory pam­phlets. What can be de­ducted as a busi­ness ex­pense? The code says “nec­es­sary” ex­penses can be claimed, and the IRS spells out this nu­ance in one of its guides: “An ex­pense doesn’t have to be re­quired to be con­sid­ered nec­es­sary.” If you have dif­fi­culty un­der­stand­ing that, well, so did Leona Helm­s­ley, the late hote­lier who claimed too many ex­penses and was con­victed of tax fraud in 1989.

On oc­ca­sion Capi­tol Hill, feel­ing re­morse, moves to strip away some of the com­plex­ity. Sim­pli­fi­ca­tion was one of the stated goals for the Joint Com­mit­tee on Tax­a­tion when it was cre­ated in 1926 at the urg­ing of Sen­a­tor James Couzens (af­ter he dealt with a lit­tle IRS prob­lem of his own, a $10 mil­lion bill for un­paid taxes).

De­spite the com­mit­tee’s ef­forts, the code got big­ger. And big­ger. In 1986 Con­gress re­solved to make a clean sweep by lim­it­ing de­duc­tions and low­er­ing rates. The land­mark Tax Re­form Act that re­sulted was the sig­na­ture ac­com­plish­ment of then-ways & Means chair­man Dan Rostenkowski, be­fore he was jailed on cor­rup­tion charges.

Alas, once again rates crept up and new de­duc­tions crept in. Wolters Kluwer Tax & Ac­count­ing counts 5,886 changes by Con­gress to the tax code since 2001. But Ways & Means mem­bers are happy. The Cen­ter for Re­spon­sive Pol­i­tics counts among their big­ger sources of cam­paign cash the Na­tional As­so­ci­a­tion of Real­tors and Mass Mu­tual Life In­sur­ance.

Now on the ta­ble: a sweep­ing over­haul that would elim­i­nate de­duc­tions and lower rates. Could it hap­pen? Per­ish the thought. If we had a flat tax, who would buy tick­ets to a Kevin Brady fundraiser?

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