Taxing Your Credulity

Taxing Your Credulity

Taxing Your Credulity

The conventional wisdom debunked.
April 16 1997 3:30 AM

Taxing Your Credulity

Forgive them their excesses. The current system is pretty fair, and it works.

(1,233 words; posted Tuesday, April 15; to be composted Tuesday, April 22)

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      At risk of life or limb, I rise in defense of the Internal Revenue Service.       Yes, the IRS. The same people who conspired to bring fresh misery to your life this week as you struggled to complete Form 1040 or Form 4952 or even Form 8582. And as you sweated and cursed, a chorus of politicians ratified your complaints about the IRS, promising, in once and future candidate Steve Forbes' famous phrase, to "kill it, drive a stake through its heart, bury it, and hope it never rises again."
      Of course, you'll be completing Form 4952 only if you happen to have some "investment interest expense deductions" to claim. And Form 8582 won't be taxing you unless you've been dabbling in real-estate shelters and have some "passive activity loss limitations" to declare. Most people don't have either. Those who do usually have tax accountants who assist them. And they're not likely to have stumbled into these complicated financial transactions by mistake--they took them on with the express purpose of minimizing their tax bill. Sing no sad songs for them.

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In fact, for three out of four tax filers, this is windfall week. They'll be getting refunds from the Treasury. Early filers already have. Many (perhaps 25 million) will have spent only 10 or 15 minutes on the phone, using the IRS's Telefile system that lets you punch in your basic data on a touch-tone phone and have the IRS calculate your tax bill (or refund) for you. More than a million others are using computers to calculate and file their tax liabilities--and to access the forms and instructions the IRS now posts on the Internet.
      No matter. As House Majority Leader Dick Armey, R-Texas, gleefully reported last Saturday, about 70 percent of the people surveyed in a poll he commissioned said that the income tax ought to be dumped. This is great news for Armey and his adherents. It means they've been successful in suckering most Americans into believing that they'd be better off under some other scheme for paying the government's bills.
      The scheme that Armey promotes is a "flat tax"--one that would be levied on the average wage earner at the same rate as on, say, multimillionaire Forbes. It might even be some sort of national sales tax, collected directly or indirectly whenever you bought something. Whatever form it assumed, you can be sure of one thing--it would take a lot less money out of the pocket of people like Mr. Forbes.
For, despite its grievous faults, the one shining virtue of the income tax is that it is graduated. It asks better-off people, for whom the additional dollar is far less precious, to contribute more of it to the public weal than people for whom each added dollar is very valuable indeed. While many--too many--very wealthy people find ways to avoid paying their nominal share, the income tax is still notably progressive. More than 16 percent of its revenues are collected from the top one-fourth of 1 percent of taxpayers; more than half comes from the 10 percent of taxpayers with income over $75,000; and three-fourths comes from the 25 percent with income over $50,000.
      Nor is it the progressivity of the tax system that makes April 15 a nightmare. Even if you are among the majority of taxpayers whose income is high or complicated enough that you had to fill out the regular 1040 ("long form"), you may have noticed that the complexity didn't come from the fact that the rate schedule isn't "flat." The IRS obligingly gives you a table so that once you've computed your taxable income, calculating your tax bill requires only one multiplication and an addition.
No, the complexity comes from all those exemptions, deductions, and other preferences that riddle the tax code. And these didn't get there because your not-so-friendly IRS examiner had time on his hands. Many were born because your representatives in Washington listened to special interests--not all, or even most of them, unworthy causes--arguing that their particular circumstances deserved preferential treatment. Others owe their existence to the nasty habit that Congress and the president have adopted of disguising spending programs as tax breaks.
      Take, for example, President Clinton's proposal to give "Hope Scholarships" to college students who maintain B averages. If the president really wanted to make sure the scholarships went to those who deserved them, he would set up a program with trained supervisors to administer it. But that would show up on the ledgers as new spending (bad). So Clinton proposes to hand out his hope in the form of tax credits (good)--leaving it to the IRS, in its spare time, to monitor the report cards (silly).
      And, of course, once into law, tax breaks and preferences become inviolable--no matter how outmoded, inefficient, or downright perverse they turn out to be. After all, to eliminate them would be to raise taxes, the cardinal sin in our modern political canon.
Armey's troops do claim they want to eliminate all deductions and credits. (Though, by also proposing to abolish the capital-gains tax, the flat taxers would vastly inflate the biggest tax loophole of them all.) If they actually cut all of them, revenues would rise a lot, and using those extra proceeds to cut tax rates would be a sensible and efficient move. But it wouldn't raise enough revenue to flatten the tax schedule without shifting a big burden to less affluent taxpayers.
      Congress made a big move in the direction of eliminating loopholes in the 1986 tax reform, but it didn't stick. The real-estate moguls, art collectors, and friends of other worthy causes complained; the preferences began to creep back in; the tax rates climbed.
So do not blame the hapless IRS agent (average pay, including benefits, about $54,000) as he seeks to enforce our hopelessly complicated tax laws. Of course, we should crack down hard on IRS workers who surf through tax records, and clean up the administrative system that has wasted billions in failing to modernize the IRS's ancient computers. But it is hardly surprising that many of those diligent, honest souls who used to take government jobs now seek less vilified forms of employment.
      And if, by chance--and the odds are a mere one in 100--an agent comes to audit your return, treat him politely. He's working for you, the honest taxpayer. Disrespect for the law is not as rampant here as in many other countries--where civil society has been crippled by the inability to collect taxes. But we have a growing number of tax cheats. They evade as much as $100 billion in taxes a year--enough to wipe out this year's likely budget deficit. Every dollar they don't pay, you will, one way or another.
      An extra dollar spent on enforcement is estimated to return $4 in added taxes. Yet Congress, for reasons we will charitably assume are unaccountable, seems to have a soft spot for tax cheats. It keeps cutting the IRS's resources. Two GOP legislators even propose to ban random audits (mightn't even you be tempted to cheat?) and make IRS agents personally liable if they make any mistakes (how would you feel if your boss put in such a rule?). So if you're thinking of marching in Armey's army, remember: It's you who'll be paying for the enlistment bonuses.
Links The Internal Revenue Service now maintains a Web site at which you can find advice on filing, discussions of various sections of the tax code, and a full range of forms. It looks friendly, anyway. Warning: It's very busy this week. For a review of the IRS's effort, see The Taxman Webbeth. How big a burden is the tax-collection bureaucracy? Lindsay Sobel lays out the facts in " The Gist: The IRS." For a discussion of why cutting or eliminating the capital-gains tax will lead to still more tax complication and avoidance, see " Eight Reasons Not to Cut the Capital-Gains Tax," by Michael Kinsley. John C. Goodman, president of the National Center for Policy Analysis, takes the opposing view in a " Dialogue" with Kinsley. And if you want to sign up with the IRS-bashing forces, the National Taxpayers Union will be glad to enlist you.

Jodie T. Allen is the senior editor at the Pew Research Center.