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Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) have announced that they are working on a major overhaul of the tax system. They have named this bipartisan bill the “Tax Fairness and Simplification Act of 2010”. When I see a title like this I have just one thing to say: be afraid, be very afraid. The reason the title alone raises red flags is that whenever I see politicians use the words “fairness “or “simplification” I know I need to hide my wallet; in this case they are using both words. As I said, be afraid. The Senators say their “proposal would eliminate many of the specialized tax breaks that currently benefit one group of Americans over another. The changes we propose will create policies that benefit everyone.” One thing I know is that there is nothing that government does with taxes or anything else that benefits everyone! For this next part I will need to also quote directly from the Senators article because you just are not going to believe this one. “In an effort to make paying taxes even simpler, taxpayers will be able to request that the IRS prepare a tax return for them”. You just can’t make this stuff up. Simplifying the tax code sounds like a worthy cause, especially now. Did you know that beginning this year the IRS has add a new schedule to the 1040. This new schedule L must be used to claim the standard deduction. That’s right you now have to complete a one page form just to claim the standard deduction. Something obviously must be done but can we trust the people that brought us an entire schedule to claim the standard deduction to simplify anything? History shows us that every time Congress has “simplified” the tax code it has become more complicated. For example, before the last “tax simplification act” individuals had just one type of income. The act “simplified” that one type of income into three types of income; earned income, portfolio income and passive income. This new simplification act is already proving to be no different. Again I will quote from the Senators articles: “Our legislation would exempt taxpayers from paying taxes on the first 35% of their long-term capital gains income. To qualify as a long-term gain, investments would have to be held for at least six months for the first $500,000 of capital gains, and for at least one year for capital gains after the first $500,000”. I may be crazy, but, to me, simplification would be something like “no tax on capital gains.” The biggest issue I have with “simplification” is that it ultimately leads to higher taxes. Most of the “complications” Congress tries to remove are tax breaks and deductions. Often in tax simplification legislation the Congress tries to make up for the lost deductions by lowering the tax rate. The problem is, as we saw the last time we had a simplification, over time Congress gradually increases the tax rates but does not give back the deductions. It makes me want to scream every time I hear a politician say they are just bringing back the tax rates to where they were before. Nothing is simpler than the 2 line tax form that that many of us joke about:” Line 1 – enter how much you made Line 2 – Send it in.” We could make it a little more complicated by making it a three line form. Line 1 – enter how much you made Line 2 – multiple by 1% Line 3 send in the amount on Line 2. Most of us would really like that new form at first, but in a few years we would change our minds when Line 2 then reads – “multiply by 45%.“ The real complications (the ones that Congress does not want to get rid of) come from Congress’ attempts to make the tax code “fair”. In other words they try to make sure that the “rich” pay their “fair” share of taxes. We see this with deductions being phased when income is over a certain point, increased tax rates for income over certain amounts and the inability to use credits and losses if income is too high, to name just a few. Honest and useful tax simplification would be to remove the income limits that are imposed in much of the tax code. Ultimately I believe that would also bring true fairness as a side effect. How do I know that this version of tax simplification won’t address the complications I think should be changed? First, remember the new, more complicated capital gains calculation I shared with you above. The reason it is complicated is because they do not want the “rich” to benefit from the new capital gains rules. Second, here is another quote from the Senators: “We make fiscally responsible tax reform possible by eliminating many of the specialized tax breaks strewn throughout the tax code. Our legislation maintains the most popular tax breaks like the mortgage interest deduction and the health-care tax exclusion, while eliminating specialized exemptions.” Why does simplification always mean fewer deductions to these people? |
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