Why Our Tax Code is So Complicated

There are plenty of reasons why the tax code is so complicated -- the length of time tax law have existed, special interest giveaways, and the implementation of anti-avoidance laws.
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One of the most common refrains about the US tax code is it's too complicated -- and that compliance costs far too much for the average business. Compliance costs (the cost of paying people to plan tax-advantaged strategies) are very high. But there are reasons for that complication.

First of all, in real life I am a tax lawyer. I spend at least part of every day working with the tax code or various legal supplements such as Westlaw and BNA tax management service. The abridged code which I use (and which answers the majority of my client's issues) is about 2000 pages long -- and the type face is pretty small. It has taken me about two and a half years to read through most of the important sections of the code and relevant Treasury regulations and case law. And I still haven't read through the whole thing. So -- how did the code get to be so complicated?

For most people the code really isn't that complicated. In fact most people really won't deal with the code in any meaningful way for their entire lives. The tax deduction you took last year will probably be a tax deduction this year; if it changed it will be a big deal so you would have heard about it. The biggest problem most people face is they don't keep adequate records. I know it's an incredible pain to do so (I'm a tax lawyer and I get tired of asking for, keeping, and then sorting receipts of all sorts), but keeping track of these things makes preparation a lot easier. And that's really what the major issue is for about 90-95% of US citizens. They'll deal with maybe 250 lines of the U.S. tax code at most. And frankly -- that isn't much.

So -- what about the rest of the tax code? Why are there so many entries and sections and subsections? There are several reasons:

First, tax law has been around for about 100 years. That means there are 100 years of legal decisions, code revisions and laws added to the code at various times and in varying degrees of complexity. And remember -- most of the time Congress doesn't take stuff out of the code (in fact, they don't do so for most sections of the US code). So that's where the first level of complexity comes in.

Secondly, there are a ton of special interest giveaways in the tax code. Simply looking at a small part of the code in one of the online code sources shows that at least half of the items in sections 101-140 (items specifically excluded form gross income) are there for a particular special interest. Ever wonder why life insurance isn't included in the recipient's gross income? Ask the insurance industry. How about, "exclusion of gain from the sale of principal residence?" Ask the National Association of Realtors. You get the idea.

Third, there are a ton of "anti-avoidance" rules. These are rules that were put in place because a taxpayer attempted to use the code to get a tax break not specifically allowed by the code. Typically the taxpayer attempted to use an extremely technical reading of the tax code that clearly violated the spirit of the law. So the IRS challenged the taxpayer's interpretation and eventually beat the taxpayer in court. To prevent that situation from happening in the future, Congress added a code section. A classic example of anti-avoidance laws taking of space in the code is the corporate tax section (Subchapter C). At least 40% of the provisions in this section are related to anti-avoidance measures.

So -- why don't we simplify the code? The first place to start would be to have a group of English professors (who know how to write simple sentences -- subject, predicate, verb; lather, rinse and repeat) go through the code and simply rewrite code sections that are poorly written. That in and of itself would solve a large number of problems and would take care of many issues.

As for the special interest giveaways, I can't see the life insurance business letting you go without one of the ugliest legislative fights in history, but you're more then welcome to try. The same goes for the National Association of Realtors or various other interests. The bottom line is specific industries have fought hard for specific code sections. Getting them out of the code is pretty difficult. More power to anyone who can actually accomplish that task.

As for the anti-avoidance rules embedded in the code, there is an important possible revision here. The entire branch of anti-avoidance law could conceivably be boiled down to the "substance over form" doctrine, meaning the court will look to what is actually happening as opposed to the paperwork of the transaction. It may be possible to have a series of code sections that deal with anti-avoidance law put into the code and then take out the specific anti-avoidance provisions in the code. But this would be a Herculean task that would require a roundtable of professors and practitioners who write and then rewrite a unified section followed by public debate, and so on. In other words, this is possible but it would be a lifetime's worth of work.

So, there are plenty of reasons why the tax code is so complicated -- the length of time tax law has existed, special interest giveaways, and anti-avoidance laws implemented into code. Some of these situations can be dealt with through simple editorial changes -- making the code more clear. Other areas are far tougher because special interests specifically lobbied for specific code sections. And finally, anti-avoidance changes are possible, but would require a unified effort from the tax section of the bar.

But for most people -- at least 90% of U.S. taxpayers -- it's not an issue you have to worry about because it really doesn't effect how you calculate your taxes.

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