Bids to simplify taxes run into a thicket of concerns

Thomas Field has been a tax lawyer for 40 years. He's also publisher of Tax Notes, the news and information bible for the nation's massive tax industry.

But after incurring capital gains with the sale of a small rental property last year, Mr. Field found that figuring out the tax consequences was just too complex. That despite having done his own taxes as "an exercise in humility" for years. "I don't believe I could have prepared my tax return," he admits.

Many taxpayers may sympathize with Field, especially today, the deadline for individuals filing their federal taxes.

Treasury Secretary Paul O'Neill, speaking of the increasing complexity of the tax system, called it "an abomination."

"It needs to be fixed," he testified to Congress in February.

Toward that end, the Treasury releases today a "white paper" on tax simplification for individuals. A similar paper on business taxes is planned for summer. And Rep. Rob Portman (R) of Ohio plans to introduce a tax-simplification bill this week.

Whether anything will come of this effort remains to be seen.

The last time Congress passed a major tax-simplification bill was in 1986 under President Reagan. Among other things, it equalized the rate on income taxes and capital gains, thereby ending dozens of tax-dodging schemes. That feature lasted only two years. Congress, bowing to pressure, again cut the capital-gains rate.

Since then, Congress has passed dozens of tax bills making literally thousands of often-complex tax-law changes.

The Bush tax-cut bill of last year was no exception. It "may well be the pinnacle of tax complexity in the history of United States taxation," write two tax-accounting scholars, William VanDenburgh of Louisiana State University and Philip Harmelink of the University of New Orleans.

"The act not only has complex annual changes for the next 10 years ... but astonishingly, it is scheduled to be rescinded on Dec. 31, 2010," they note.

President Bush's budget document for fiscal 2003 has a sizable section on tax simplification. It notes that millions of people with relatively uncomplicated financial circumstances file form 1040EZ – the easy one.

But for those among the 130 million filing who itemize their taxes this season, the tax system can be daunting.

Indeed, printed editions of the entire tax code today fill as many as 2,000 pages of small type.

"It does not have to be that way," says Field. Ten years ago, his organization and Harvard Law School turned out a "Basic World Tax Code" aimed to provide countries emerging from communism with a model tax code. It covers the whole shebang of taxes in 200 pages of large type.

Kazakhstan and Ukraine have adopted much of this code; Russia, parts of it. Russia's revenues soared since it cut tax rates and simplified its system.

So why is the US system so complex?

"It all lies at Congress's door," says Charles Davenport, an expert at Rutgers University in New Brunswick, N.J.

Responding to special-interest groups, campaign donors, and taxpayers in general, politicians have used the Internal Revenue Code for a wide range of purposes, often good ones, other than raising money.

It gives homeowners, small businesses, farmers, and those adopting children or seeking a costly education special breaks.

"Who can be against that?" says Field. "Congress, in an effort to do good, has done bad, at least on the complexity side."

Most tax bills include dozens of tax breaks for special interests, often tiny groups that have the ear of some influential tax writer in Congress.

In some cases, Congress could accomplish its social or other goals by spending money rather than giving tax breaks. But conservatives charge that such measures expand government – and lead to increased taxes.

So both Presidents Clinton and Bush proposed tax credits when seeking to further some goals. Bush, for example, calls for refundable tax credits to help more people afford health insurance.

Despite the Bush white papers, getting tax simplification through Congress will not be easy. Proposing it may be good political cover. Actually fighting for it will take an expenditure of political capital.

One problem is that the federal budget has fallen into deficit. Simplification generally costs revenues. If it boosts taxes for any group, that group will likely oppose the measure.

Some argue that a flat tax on all income would reduce complexity. But that would depend on details.

Professor Harmelink urges the American Institute of Certified Public Accountants and the American Bar Association to get behind tax simplification with more enthusiasm. But, in a way, these tax practitioners would be biting the hand that feeds them. The proportion of individual tax returns with a paid preparer's signature has risen from 46 percent in 1985 to 54.5 percent in 1999.

One savior for many taxpayers has been several computer programs that ease tax preparation. So far, Congress has not allowed the IRS to offer a free program, as it does free tax forms.

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