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Wednesday, December 12 , 2018, 2:35 am | Fair 45º


Harris Sherline: Scrap the Income Tax (and the IRS), Part II

The system's ever-increasing costs are largely hidden from average citizens

[Noozhawk’s note: Second in a series. Click here for the first part.]

By 1992, America’s national debt had grown to more than $3.8 trillion, increased to more than $4.5 trillion in 1994, and is now more than $14 trillion.

The nation finds itself on a taxation treadmill to feed an out-of-control budget monster. But the taxes Americans pay are not the only cost they must bear to support the nation’s huge budget deficits. There are also the hidden costs of taxation.

The Cato Institute reported that businesses and individuals now waste more than 6.6 billion hours on federal tax compliance activities each year. That’s equivalent to more than 3 million people working full time, just to deal with tax compliance.

This is vividly illustrated by the fact that when General Electric Co. filed the corporation’s tax return electronically, it required 24,000 pages to document. That’s right, 24,000 pages. The Associated Press (June 1, 2006) noted, “If GE had sent paper forms, the return would have stacked up 8 feet high. Instead, it took up 237 megabytes” to file electronically.

The Tax Foundation estimated that in 2005 the total costs associated with the federal income tax were $265.1 billion, noting, “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.”

These are essentially nonproductive hours that could be far better invested in real, wealth-producing work! Think about the army of people at both GE and the Internal Revenue Service who must be involved in preparing and reviewing a 24,000-page tax return, and that’s just one major corporation.

The total economic cost caused by the tax collection system puts it almost on a par with the cost of Medicare and at about two-thirds of the defense budget. The costs keeping growing, and the question is, “Can we really afford to continue this?”

These costs are largely hidden from the average citizen. Most people do not stop to figure out how much time it takes to fill out the flood of tax forms that rain down on them every year, or the costs they incur.

The complexity of our tax system is widely recognized, but generally little understood. What the public sees is a tax system and a bureaucracy that continue to expand, seemingly without limit, and a tax law that is so complicated that literally no one understands it, including the IRS. It is a system that is unevenly administered and unfairly applied. Everyone is cheated by it in one way or another.

Two facts illustrate the complexity of the federal tax law: The tax code, regulations and IRS rulings now require more than 73,000 pages to document, and from 1986 to 1996, there were more than 5,000 changes in the tax code.

No one could possibly be expected to know and understand such an incredible volume of information, much of which is ambiguous and contradictory.

The complexity has been graphically demonstrated by surveys of private-sector tax preparers that were conducted by Money Magazine. In all its surveys from 1987 to 1991, 50 professionals gave 50 different answers for the tax liability of the same hypothetical family financial profile. And, none of the 50 answers were correct.

The results of their 1992 survey were even more troubling because the range of tax liability that was calculated by the 50 tax preparers varied so greatly. On the high side, the tax for the sample family was determined to be $46,564. On the low end, it was $16,219. It is both interesting and alarming to note that there was no right answer. Because of the ambiguity of the tax code, the best that could be done was to calculate a “target tax,” which was $26,619.

And, the situation has grown worse in subsequent years.

Additional evidence of the effects of our complex tax laws can be seen in the number of taxpayers who feel they must use an accountant or tax service to prepare their returns. IRS national opinion surveys conducted in 1987 and 1990 confirmed “that the most frequently given reasons for using a preparer were the complicated nature of return preparation, or fear of making mistakes.”

» In 1981, 41 percent of taxpayers used a tax professional.

» In 1986, it was 46 percent, or more than 45 million filers.

» By 1992, 50 percent, or 57.5 million citizens sought professional help. That’s an 18 percent increase during a period when the tax laws were supposedly simplified.

» In 2006, 61 percent of taxpayers paid someone else to prepare their 2005 returns for them.

Further insight into the complexity of the tax laws is found in the fact that by 1993 about 60 percent of the House Ways & Means and Senate Finance committees did not prepare their own tax returns. This is especially troubling when you realize that these are the two committees that write our tax laws.

— 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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