May 2009

Paying Taxes is a Pain!

by Amy K. Frantz

“Most Americans would rather snake a toilet than do their own taxes,” began a recent article in USA Today.[1]  The federal income tax code has become so complex that many people are unable to even attempt to calculate their own taxes.  “More than 80% of individual taxpayers find the process of filing tax returns so overwhelming that they pay for help.  About 60% of taxpayers pay preparers to do the job, and another 22% purchase tax software to help them perform the calculations themselves,” said Nina Olson, the National Taxpayer Advocate at the Internal Revenue Service.[2]  The fact that taxpayers need an advocate (in fact, an entire independent organization) within the IRS to provide them with assistance is more evidence that our tax system is too complex.[3]

National Taxpayers Union reports that “taxpayers using any of the 1040 tax form series will spend an average of 26.4 hours and $209 completing their returns” for the 2008 tax year.[4]  “Treasury Department paperwork, some 90 percent of which consists of personal and business income tax forms, imposes a burden of 7.75 billion hours on Americans.  That’s the equivalent of some 3.7 million employees working 40-hour weeks year-round without any vacation.”[5]  And that’s just for federal taxes!  Imagine the growth in our economy if these resources could be targeted to something other than paying our federal income taxes.

Tom Herman, a Wall Street Journal staffer with four decades of experience, and on the Journal’s Tax Beat since 1993, reminisces about his first major tax story in an article announcing his retirement.  “I asked five different tax-preparation services in the Atlanta area to prepare returns for a family of four with fairly typical finances.  The results:  At one extreme, a tax expert said the family was entitled to a federal income-tax refund of $652.04.  But another said the family owed $141 – a difference of $793.04…Since then, our tax system has evolved from a mess to a nightmare.”[6]

Tom Herman and Nina Olson add their voices to millions of others who believe we need to reform our tax system into something simpler, which imposes less of a burden on those who are trying the best they can to pay their taxes. One of the earliest articles I wrote upon arriving at Public Interest Institute in 1996 was about the proposal to replace our federal income tax with a national retail sales tax.  A few years later the Institute staff attended an event on the “Scrap the Code:  National Tax Reform Tour” featuring then-Congressmen Dick Armey and Billy Tauzin.  One of the latest proposals is from Congressman Paul Ryan, who has proposed providing taxpayers with a choice to pay income tax “through existing law, or through a highly simplified code that fits on a postcard with just two rates and virtually no special tax deductions, credits, or exclusions.”[7]

Candidates for election and elected officials running for re-election generally agree that our tax system needs some kind of reform. So why, then, hasn’t our tax system been simplified?  National Taxpayer Advocate Nina Olson sums it up: “In my view, it’s because elected officials believe the political risks of putting forward a proposal to vastly simplify the tax code outweigh the political benefits.  Each tax break has a constituency, and constituencies that stand to lose benefits tend to organize quickly to protect their interests.”[8]

Another problem is agreeing on what kind of reform we need. Plenty of changes have been made to the federal tax code, but few of them have made it any simpler to pay our taxes.  “Since the beginning of 2001, there have been more than 3,250 changes to the tax code – an average of more than one a day – including more than 500 changes last year alone.”[9]

On April 15 of this year, President Obama, who supported tax simplification during his campaign, pledged again to uphold his promise, saying “he had given former Federal Reserve Chairman Paul Volcker’s special advisory board until the end of the year to report back on how the tax code should be simplified.”[10]

One of the proposals under consideration by the White House, the “Simple Return” plan, does not actually make the tax code any simpler, instead it would make citizens more reliant on government. Here is how The Wall Street Journal described the President’s plan:

Under the ‘Simple Return’ plan, the Internal Revenue Service would complete tax returns for taxpayers whose sole income comes from one employer and whose interest income comes from one bank. The IRS would then send a copy of the return to the taxpayer.  If the first wave of the program worked well, it could be expanded to other taxpayers.[11]

I shudder to think about how much paperwork and aggravation will be involved if you don’t agree with the amount of your government-calculated tax bill!

Tax-paying citizens should demand real tax simplification – making the tax code easier to understand and comply with – not phony reforms that merely make taxpayers reliant on the government, rather than paid preparers or tax software, to prepare our income taxes each year.

Amy K. Frantz is Research Vice-President at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Sandra Block, “Economic downturn has more taxpayers doing their own taxes,” USA Today, April 14, 2009, <http://www.usatoday.com/money/perfi/taxes/2009-04-14-doing-taxes_N.htm> (April 15, 2009).

[2] Nina E. Olson, “We Still Need a Simpler Tax Code,” The Wall Street Journal, April 10, 2009, <http://online.wsj.com/article/SB123933106888707793.html> (April 13, 2009).

[3] “Have a Tax Problem? ….Need Help?” Internal Revenue Service, U.S. Department of the Treasury, <http://www.irs.gov/advocate/article/0,,id=97392,00.html> (April 17, 2009).  The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

[4] Peter J. Sepp and Natasha Altamirano, “Study from Nation’s Largest Taxpayer Group Shows Individuals, Corps., Spending Nearly $300 Billion on Tax Compliance,” National Taxpayers Union Press Release, April 14, 2009, <http://www.ntu.org/main/press.php?PressID=1099&org_name=NTU> (April 15, 2009).

[5] Ibid.

[6] Tom Herman, “What I Learned in My 16 Years on the Tax Beat,” The Wall Street Journal, April 15, 2009, <http://online.wsj.com/article/SB123976053040419549.html > (April 15, 2009).

[7] Congressman Paul Ryan, “A Roadmap for America’s Future,” Press Release – Summary of proposal, <http://www.house.gov/ryan/press_releases/2008pressreleases/RoadmapSummary.pdf > (April 14, 2009).

[8] Olson.

[9] Olson.

[10] Jonathan Weisman and John D. McKinnon, “Obama Calls for Simpler Tax Code,” The Wall Street Journal, April 16, 2009, <http://online.wsj.com/article/SB123980697575621155.html> (April 16, 2009).

[11] Ibid.