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Sunday, February 17 , 2019, 6:47 am | Fair 49º


Harris Sherline: The Law of Unintended Consequences

Federal income tax code and states' costs of compliance serve as good examples

“Let me introduce Mauldin’s Rule of Thumb Concerning Unintended Consequences: For every government law hurriedly passed in response to a current or recent crisis, there will be two or more unintended consequences, which will have equal or greater negative effects than the problem it was designed to fix. A corollary is that unelected institutions are at least as bad and possibly worse than elected governments. A further corollary is that laws passed to appease a particular group, whether voters or a particular industry, will have at least three unintended consequences, most of which will eventually have the opposite effect than the intended outcomes and transfer costs to innocent bystanders.” — John Mauldin’s weekly e-letter, March 3, 2012

Perhaps one of the best-known “unintended consequences” is Newton’s third law of physics: “Every action has an equal and opposite reaction.”

Politicians continually fail to recognize when they adopt legislation that people don’t just stand still and “take it.” They react and take steps to protect themselves or to avoid the consequences in some way.

Pass a law that limits them in some way or attempt to dictate a specific course of action they must follow, and people will invariably find a way around it — or simply ignore it.

In turn, politicians and bureaucrats invariably pass more laws or rules trying to force people to follow their dictates. On and on it goes, piling up laws and rules until all understanding about compliance becomes so confused and contradictory that no one really knows what they should do. In an effort to further clarify the rules, bureaucrats issue more rules and regulations, only to further confuse the situation.

The federal income tax code and IRS regulations are good examples.

In 2006, “The Rising Cost of Complying with the Federal Income Tax” by Scott Hodge, J. Scott Moody and Wendy Warcholik, Ph.D., noted: “In 2005, taxpayers will pay roughly $1.2 trillion in federal income taxes. But America’s tax burden is more than just the amount of tax paid. It also includes the cost of complying with federal taxes, including tax planning, paperwork and other hassles caused by tax complexity. ... In the last century the cost of tax compliance has grown tremendously. This is due partly to the inherent difficulty of taxing income, but also because of growing noneconomic demands lawmakers place on the tax code ...

“In 2005, individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects. Projections show that by 2015, the compliance cost will grow to $482.7 billion. ... The burden of tax compliance does not fall evenly on taxpayers. It varies by type of taxpayer, income level and state. In 2005, businesses will bear the majority of tax compliance costs, totaling nearly $148 billion or 56 percent of total compliance costs. Compliance costs for individuals will be $111 billion or 42 percent, and nonprofits will bear nearly $7 billion or 2.5 percent of the total.

“When examined by income level, compliance cost is found to be highly regressive, taking a larger toll on low-income taxpayers as a percentage of income than high-income taxpayers. On the low end, taxpayers with adjusted gross income (AGI) under $20,000 incur a compliance cost equal to 5.9 percent of income while the compliance cost incurred by taxpayers with AGI (Adjusted Gross Income) over $200,000 amounts to just 0.5 percent of income.”

Another example of the “law of unintended consequences” is the cost of compliance: “State-by-state estimates of the 2005 federal compliance cost also vary widely because state populations and economies differ so significantly. On a per-capita basis, Wyoming ($1,242), Delaware ($1,181) and Colorado ($1,167) face the highest compliance cost while Mississippi ($658), West Virginia ($689) and Tennessee ($705) face the lowest. Measured per $1,000 of income, Montana ($38), Utah ($37) and Wyoming ($33) face the highest compliance cost while California ($19), Connecticut ($20) and Massachusetts ($21) face the lowest.”

Since 2005, instead of improving, the situation has only gotten worse.

During World War II, the federal tax code increased from just 504 pages to 8,200 pages in 1945. And, since then, the number of pages in the U.S. Tax Code has further increased to 71,684 pages.

Think about that. Almost 72,000 pages of rules and regulations, phrased in technical jargon.

The ultimate “unintended consequence” of this is the fact that the U.S. federal income tax laws have become so voluminous and complex that no one can possibly understand them, not even the most sophisticated tax lawyers or accountants.

— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who as lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his blog, Opinionfest.com.

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