Why the U.S. Tax System is Dizzyingly Complex

Why the U.S. Tax System is Dizzyingly Complex

“The tax code is 10 times the size of the Bible, with none of the good news,” once joked former U.S. Rep. Dave Camp, who pushed for extensive overhaul of the U.S. tax code during his time as chairman of the House Ways and Means Committee.

For anyone who’s ever set eyes on a fraction of the federal tax code, it doesn’t take political experience to recognize that it is dizzyingly, escalatingly complex. While today’s federal tax code spans about 75,000 pages, this is three times longer than when President Jimmy Carter referred to it as “a disgrace to the human race.”

The tax code can be so complex that even in professional hands it is not necessarily error-free. A recent investigation by the Government Accountability Office of 19 professional tax preparers found that most of them calculated incorrect refunds.

If time is money, navigating the complexities of the filing process is astronomically expensive. According to the IRS’s own research, complying with the tax code consumes nearly 6 billion hours each year. (If this work were performed by a single individual, it would require 700,000 years of unbroken time to complete.)

The tax code comprises almost 4 million words, and new provisions mount daily. According to the Pew Research Center, 59% of Americans feel the code needs massive reform. Interestingly, the study found this vocal majority objected even more to the complexity of the code than they did to paying taxes.

The reasons for this complexity are many, though they relate primarily to the fact that the U.S. administers a great deal of its social policy through tax expenditures, and taxes households rather than individuals.

Tax expenditures represent a form of government problem-solving executed via tax revenue that is designed to encourage and discourage various social and economic behaviors. For example, if the government wants to encourage homeownership, it has essentially two options: set up a special program for this, or grant homeowners a tax break for buying a house.

Tax expenditures, however, are not without problems. For one, they tend to frustrate taxpayers through complicating the tax process. In an NPR interview with All Things Considered, Deborah Schenk, the Ronald and Marilynn Grossman Professor of Taxation at New York University and editor-in-chief of the Tax Law Review, explained, “[The 2017] stimulus bill had more than 300 changes to the Internal Revenue Code, all designed to stimulate the economy, but it certainly mucked up the Code.”

Second, these tax expenditures are often virtually invisible to the average taxpayer (and seemingly intentionally so) and have thus been characterized by policy makers as “welfare for the wealthy.”

Tim Worstall, Fellow at the Adam Smith Institute in London and a regular contributor for Forbes and The Wall Street Journal, goes so far as to maintain in his Forbes article, “Why We Want a Complicated Tax System: So That People Can Avoid Taxes,” that the U.S. tax system is complicated because “we want it that way.”

“There’s an intriguing argument that actually we’ll find human happiness–that maximized utility which is the goal of all economic policy–to be highest if we had an even more complex tax system than the one we have,” asserts Worsthall.

In other words, a more complex tax system allows those who most dislike taxes and have the greatest incentive to reduce them (typically the wealthiest Americans) to be happier with a tax system that provides legal avenues to this end.

While Worsthall admits that it can appear to be an odd argument to the average person, to those within the wealth-management industry it is simply “business as usual.”

He cites as evidence for his argument a research study titled Nice Guys Finish Last: Are People with Higher Tax Morale Taxed More Heavily?, which demonstrates the existence of identifiable groups across the economy with different levels of willingness to pay taxes–some much more, and some much less.

The authors of this paper prove that demographics more willing to pay taxes (“nice guys,” as the authors refer to them) do in fact pay extra taxes and make little if no attempt to avoid them (thus “finishing last”).

In a complicated tax system, with a staggering number of allowances and exemptions, Worsthall and the authors of the study make the case that “nice guys” (those who are the least averse to taxes) will tend to forgo the considerable time, trouble, and expense required to research and leverage every conceivable legal loophole, while those most averse to taxes will do exactly that.

The tax system shows no sign of becoming less complex anytime soon, which means that for years to come many Americans will continue to utter the satirical “taxpayer’s prayer” composed by Pulitzer Prize-winning author Russell Baker and published to enthusiastic reception in the April 10, 1977 edition of the Sunday Observer:

O Mighty Internal Revenue, who turneth the labor of man to ashes, we thank thee for the multitude of thy forms which thou hast set before us and for the infinite confusion of thy commandments, which multiplieth the fortunes of lawyer and accountant alike.

Though the tax code may be dizzyingly complex, filing your taxes shouldn’t be. Our tax software can help simplify the filing process, and because we provide free professional tax support, you’ll have the peace of mind that comes with knowing that help is never more than just a click away.