Ceaseless meddling by Congress has encrusted the tax with extraordinary complications. The code tries to encourage or discourage most things, often both at once. The dozens of tax shelters for savings, for example, overlap in bewildering ways. Nobody seems to understand how the various reliefs interact – least of all the professional tax preparers who handle most of the work – so their incentive effect is, shall we say, muted. All a saver can be sure of is that if he comes to be audited, he will be in trouble according to an editorial in the Financial Times.
Just to be sure, there is the Alternative Minimum Tax. This measure, originally aimed at the rich and intended to claw back reliefs such as those just mentioned, was a breakthrough in the battle to demoralise US taxpayers. They must calculate their obligations twice, once using the standard code and again using the entirely different AMT rules. Then they must pay the higher of the two tax obligations. Not only must taxpayers find the money, they must also endure the mockery of politicians who dreamt this up.
The government has provided for a “national taxpayer advocate” – an independent office within the Internal Revenue Service to collect and disseminate data on the code’s absurdities, which Congress and the IRS then ignore. Recent findings estimate compliance costs at 14 per cent of revenue collected – a remarkable sum. In further confirmation that a sadistic sense of humor is at work, returns and their supporting documents invite taxpayers to suggest ways to simplify the forms, pursuant to the Paperwork Reduction Act of 1995.
A little over 20 years since its last comprehensive overhaul, the federal income tax is again a parody of self-defeating confusion. The height of its absurdity is that, hollowed out by exemptions and allowances, it raises so little revenue – barely 8 per cent of national income.
Read more here: Mending America’s broken tax code