TCS Daily

Life and Taxes

By Bob Formaini - August 6, 2004 12:00 AM

"If my memory serves me, and I think it does," as Chairman Kaga says on the Iron Chef each night (Food Channel, 11:00 PM, EDT) Jimmy Carter once opined that America's tax system was a "national disgrace." Now, I am not certain why he said that -- he probably thought tax collections were too low -- but I am certain why I have come to agree with his statement. Having worked since I was a teen, every year filing my own 1040, I have finally given up. This year, facing the famous April 15th deadline, I was informed by my lovely wife that I was no longer competent to do our taxes. It really hurt to hear it, as though losing my memory was just the beginning of my problems. But I had to admit that she was right. Even with a computer program that is, by most accounts, very sophisticated at this tax preparation thing, I was not able to do our return and, having paid the mortgage off last year, we weren't even itemizing!

I don't blame the people working at the IRS for this state of affairs. They don't write the tax laws; they just try to enforce them. Further, as one who believes in the Rule of Law, if my fellow citizens think income taxation is a fine idea (they sure did when they passed the 16th amendment) and want to empower the state to collect them, then I will try and follow the law as I always have. But following the law is becoming increasingly difficult and expensive. I used to spend a few hours with the paperwork, sitting at my computer. This morning, as I mail my return after -- for the first time ever -- seeking an extension, the Wall Street Journal has an article in it warning that we late filers probably will make many mistakes because they are easier to make than ever due to all the changes and the law's complexity. Well, duh!

You might be wondering why, this year, my return has become something that, as I gaze on its small novel length, reads as if it were written in some foreign language. It's simple. My wife and I are dealing with the death of her mom and an inheritance that involves two trusts, dozens of stocks, and three limited partnerships. I can understand the W2s okay. But the heart of my return is completely alien to me. I have no idea what it says or whether it is accurate. We have placed our fate in the hands of a very competent tax accountant, but even though his name is on the return along with ours, I remain somewhat uneasy signing a document that I can't understand. But we (I conned my wife into signing as well!) don't really have a choice, anymore than -- thanks to Milton Friedman, of all people -- we had a choice about a large slice of our income being withheld. (Milton now says his idea for Federal withholding of taxes was a mistake, and boy do I believe him).

You might think that somehow we have made things unduly complicated but it's Congress that has done so. I admit my employer helped a bit when it told me through its legal department that, even though I have a zero chance of influencing any bank in the world, I cannot in my name -- or my wife's -- own any financial stocks. So away went bank stocks that had been in the family for decades. The same for my wife, who works in the health care industry. These laws and regulations are supposed to stop "conflicts of interest." Yeah, right.

Then there are the partnerships, a device created to avoid other parts of the tax code, by well-to-do individuals. Hours were spent just trying to get accurate paperwork from the firms involved. The same for my very large, very famous brokerage house. The laws are so complicated, and change so often, that we received three revised summaries of stock transactions for the previous year. It's not that I day trade, or anything. We just sold and bought stock as we disengaged from things we couldn't own and bought things we can. That triggered all the silly distinctions between long term and short term capital gains before and after the law changed yet again last year. Congress talks a lot about simplifying the tax code but never does. Every change makes it worse. (And many otherwise intelligent people actually believe that creating another bureaucratic layer in our intelligence efforts will make the nation safer!)

There is something wrong with a tax code that requires so much paperwork, so many hours of preparation, so much frustration with the endless record keeping that the law demands. And that's just for individuals. The burdens on business are staggering. Even so, our return no doubt is, for our accountant, a baby sort of thing. I doubt that he even worked up a mild sweat. Compared with the returns he does for a living -- a living created by Congress and their inability to have a simple tax code and for which I certainly do not begrudge him -- our return is probably a laugher. And yet, to a guy like me with four college degrees including a PhD, it might as well be written in Klingonese. I have become, along with most of my fellow citizens, just another helpless dunce who can't deal with the complexities that our wonderful politicians yearly serve up. The upside, assuming there is one, of being a helpless dunce is that one can no longer be held responsible. Unless Congress, "simplifying the tax laws" once more, decides that the old legal doctrine of mens rea is no longer the standard for criminal behavior. If that happens, were all potentially in some very serious trouble.

Yes, as usual, America needs a good five-cent nickel. But we also need tax simplification before this growing tax code-related tumor makes us welcome our own deaths. Or, given the fiscal state of Medicare, Medicaid and Social Security, maybe that's the whole idea?

Bob Formaini is a Senior Economist and Public Policy Advisor at the Federal Reserve Bank of Dallas.


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