TCS Daily

Beauty in Simplicity

By Duane D. Freese - September 13, 2002 12:00 AM

The latest Congressional Budget Office figures on the budget paint a none-to-rosy picture of federal finances and the economy.

The report issued Aug. 27 showed the biggest drop in federal tax revenue in more than half century happened in the last year. And the once gargantuan projected budget surplus for the next decade of almost $2.4 trillion in March now stands at a mere $1 trillion.

Democrats, as could be expected, have latched on to the numbers to chastise the White House about fiscal prudence, in particular about the need to shore up federal revenues.

"President Bush still refuses to present any serious plan to get the nation's finances back in order," intoned House Minority Leader Richard A. Gephardt, D-Mo. Senate Budget Committee Chairman Kent Conrad (D-N.D.) accused the White House of "Enron-type accounting."

Considering that the CBO itself has yet to figure out the reason for the revenue shortfall, such hyperbolic rhetoric reveals a partisan attempt to tear at jugulars and not an honest concern for the nation's finances. If you're going to attack the president's plan, it would be nice to hear an alternative.

Gephardt, a few years ago, when he was interested in running for president, had one. It involved a massive simplification of taxes. But rather than dust it off now, as a House leader of the opposition today, he takes the backbencher pose of backstabbing the administration at every opportunity.

That's too bad. Because what the nation's finances and the economy really could use is a real plan for simplifying the tax code in a responsible way as opposed to merely hemming and hawing about tax cuts or scuttling them.

Rising Complications

It's been 15 years now since the last major tax overhaul in 1987. And those years have seen the tax code made into an ever more elaborate knot that would have made Gordius proud. Clinton's "targeted" tax cuts added nightmarish complexity to the code, and unfortunately the Bush administration's own plans last year have added even more twists and turns. That's especially because so many provisions - either to raise revenue or just out of ideological spite - phase out some of the deductions over time or at upper income levels.

AS a result, we even require hundreds of thousands of individuals and thousands of corporations filling out their taxes twice - once with deductions and another at a base minimum alternative tax level (pay whichever is higher). And does anyone know exactly how many capital gains tax rates will apply to investments held over varying lengths over time?

The result of all this has been to starkly increase the cost of tax compliance.

A study put out by Scott Moody, senior economist of the Tax Foundation, in February found that in 2002 individuals, businesses and non-profits spent an astonishing 5.8 billion hours complying with the federal income tax code.

The estimated compliance cost - $194 billion.

Now, if it just stopped there, that would be a significant economic drag. Indeed, even the lowest legitimate estimate of compliance cost, by Joel Slemrod of the University of Michigan, at $75 billion is a rather hefty load, if you consider that President Bush this year vetoed a national homeland security bill for going a few hundred million over estimate. (Forty years ago, Illinois Sen. Everett Dirksen noted, "A million here, a million there, pretty soon it adds up to real money." Today it takes tens of billions to get real attention.)

But it gets worse. Moody estimates that compliance costs could soar to $350 billion by 2007 thanks to all the new phase in and phase out put in as part of the Economic Growth and Tax Reform Reconciliation Act of 2001.

More Than Money

And the worst thing about the cost of tax compliance is not the waste in money itself but in human resources.

Thanks to our complex tax laws, the nation has many of its best minds devoted not to how to make a better product, or even improve our minds, but in the nonsensical pursuit of ways around and through the tax code.

Consider that 5.8 billion hours today. Now, yes, a lot of that is individual taxpayer's time, but it's worth noting that more than half of taxpayers who fill out the simplest 1040 forms go to tax preparers. So, those hours add up to a lot of lives spent juggling taxes. How many?

The equivalent of 2,774,000, according to the Tax Foundation.

That is more than the total civilian employment of the federal government. It is twice the active duty military force we have available to protect our shores and fight our wars. It is three times the number of police officers we have going after crooks.

And the tax workforce represented by it doesn't provide us an ounce of extra security. It doesn't produce any new product or improve an old one. It doesn't diaper babies or teach teens to think.

Now this isn't an argument that taxes themselves are a waste, though some are. But it is ridiculous to spend any more in collecting them than one has to in order to ensure people pay their fair share.

That is especially so now, as 78 million baby boomers head toward retirement. The younger generation can't afford to have to pay for its retirement, plus pick up the overhead for the equivalent of more than a million tax collectors just for federal taxes.

Cold War Lesson

When the Cold War ended, we didn't just keep the military - active duty and civilian - at wartime strength. We lowered the overhead - reducing that manpower by a third. And that shift of talented manpower - nearly a million people strong - in large measure helped feed the noninflationary, productivity-enhanced growth of the 1990s.

After Sept. 11, we don't have that peace dividend to fall back on. In fact, we face increased needs for military manpower and for homeland security. And in the wake of the accounting scandals, we also need more bright minds seeing to it that corporate books are clean. In short, more overhead.

All of that argues most strongly not for more tax cuts, but for tremendous tax simplification. A dollar spent on tax compliance is the same as a dollar spent in taxes. And if taxes spent on services are a drag on the private economy, then compliance costs are worse because they give no service in return. We need to cut apart the Gordian knot of the tax code so we can put additional manpower spent on tax compliance to work growing the real economy.

President Bush should latch onto Treasury Secretary Paul O'Neill's proposal for a tax summit after the election and push this kind of change. And if Conrad and Dick Gephardt don't join in the effort, they will be the one's engaging in Enron-style accounting and without a clue about where federal revenue comes from.

Cut the code, cut the costs, grow the economy, and the federal budget picture will get better. Add costly complexity to the code while increasing other federal overhead, as has happened in the last year, and the latest CBO report provides a hint of what will come - for the budget and the economy.



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