Whatever happened to simple?

Taxes have their idealistic side, and two decades ago lawmakers in Washington got particularly excited about a single tax ideal: simplification.

Why should America have a tax code that was longer than 'War and Peace'? Close the loopholes, the politicians said. End those breaks for mink farmers. No man should enjoy tax benefits that another man doesn't. All men should be tax equals!

Hard as it is to recall, Democrats were among the most eloquent promoters of the new simplification ideal. The first time your author ever heard the phrase "flat tax" was from the mouth of a young Democratic congressman, Bill Bradley of New Jersey. Mr Bradley was calling on The New Republic magazine to argue that Democrats must be the ones to bear the flat tax banner. Representative Dick Gephardt of Missouri was likewise a simplicity enthusiast.

Republicans, too, warmed to the idea. "Bipartisan support", read the headlines. The ideal of simplicity was so important that both parties flung aside differences and wrote a giant tax simplification law, the 1986 reform. For the cause of simplicity and the advantage of lower rates, voters forwent important tax advantages: credit card interest payments, for example, ceased to be deductible. (This, in case you're wondering, explains the current and disturbing trend of abuse of the home equity loan; customers unwisely jeopardise their homes and overborrow because the home mortgage interest is about the only kind of interest that remains deductible for them).

Skip ahead to today. All the tax idealism is gone. The Democrats have veered hard to the left. In his recent campaign for the Democratic presidential nominee, Mr Bradley scarcely spoke of taxes, except to advocate narrow, targeted breaks. Mr Gephardt, now House majority leader, uses that post to preach progressivity. And the Republicans are not much better.

Indeed, when it comes to taxes, lawmakers of all political background sound more like accountants than anything else these days. They generally tend to fuss about "affordable this" or "stimulus that". If you hear a congressman talking about the beauty of simplicity today, you can be sure he's speaking of his new Shaker furniture, not fiscal matters. And both parties are busy pushing new breaks and loopholes like mad.

Take IRAs, the vehicles for retirement saving. These are currently available - to some people, some of the time. If you're right handed, and it's a Tuesday, you qualify for this or that IRA. But if you're left handed, and it's Wednesday - sorry.

IRAs are so complicated they can be downright dangerous. On my wall I have a 356-page book with the scary title "Avoiding the Tax Traps in Your IRA".

Complexity pervades the rest of the code too. It takes a law degree - or, at the least, a background in tax preparation - to claim the earned income credit, a break that is supposed to make the lives of lower earners easier. This year's new tax law just makes the complexity worse. In an ironic twist, the law's authors actually acknowledged this, by giving taxpayers the explicit right to exclude from income the cost of certain retirement planning services.

What happened? First, there was a cultural sea change. Lawmakers got addicted to giving out small tax gifts. As the federal budget moved away from deficit and toward surplus, they were free to become more generous. Soon, what used to be a collection of small favours had morphed into a huge goody bag, the kind kids count on getting after the cake is finished.

But the breaks also do a lot of damage. First of all, they require higher tax rates - somebody has to pay for the goody bag, and that somebody is another taxpayer. The top 28 per cent rate of the 1986 reform is today considered "too expensive", even though the 1980s were a deficit era and this is, on paper at least, a surplus one.

There are also civic costs. The breaks turn us against each other. Around refund time - now, for many of us - voters wonder, "maybe my neighbour is getting a better deal." And a complex 1040 is also an ambiguous 1040. We are never sure that we actually filled that return out right. Nobody is.

The ambiguity gives the IRS a frightening amount of discretion when it decides to audit. Everything is a "red flag". No wonder that when it comes to taxes, citizens suddenly feel victimised.

So what's the solution? It's not just saying "time to take away the goody bag" like some crabby teacher. It's working toward a tax code that is truly even-handed. Conventional wisdom says that's impossible, now that Democrats once again control the Senate. But the new Senate majority leader, Tom Daschle said just this week he wanted to work on making law from the "centre". It's worth recalling that it was the centre that once set tax simplification as one of its most cherished goals.

© Copyright 2001 Financial Times

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