The News Tribune (Lite) - It’s high time we simplified the tax code

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It’s high time we simplified the tax code

THE NEWS TRIBUNE
Dear President-elect Obama:

Maybe it’s because tax season is looming ominously – or maybe it was your long list of campaign promises – but taxes are at the top of my mind when thinking about my financial wishes for 2009.

My one overriding hope: that you will show far greater courage than your three most recent predecessors when tinkering with the tax code.

What does courage have to do with taxes? At the moment, not a thing. The U.S. tax code is riddled with complexity ultimately caused by a lack of courage. And this complexity makes it virtually impossible for most Americans to file accurate tax returns – with or without help.

More than two-thirds of taxpayers rely on a paid preparer or software to file, even though fewer than one-third of taxpayers itemize deductions.

But even tax professionals make mistakes on 65 percent of the returns they prepare, according to a recent study by the Treasury inspector general for tax administration.

What makes the tax code so mucky? Over the last 22 years, Washington has engaged in games that could be called Hide the Unpleasant Reality and Give Me Credit.

For instance, welfare has a negative connotation, so we did away with some direct payments to the poor and created the earned income tax credit. This provision can give as much as $4,825 to a family that pays no federal income tax. In other words, it’s a subsidy. But we don’t have to call it welfare because it’s administered through the tax code.

What’s the harm in that? Millions of people who would otherwise have no obligation to file income tax returns – because they don’t make enough money – must file returns to claim the credit.

Of course, if this subsidy were delivered through the welfare system instead of the tax system, people would still have to apply for the benefit. But it’s likely they’re already receiving food stamps, so at least the bureaucracy would be familiar.

Another example: The idea of “means testing” for Social Security – reducing or eliminating benefits for high-income people – brought howls of protest.

So now the government subjects some or all of a high-earning recipient’s Social Security benefits to income tax. And now all Social Security recipients have to fill out a 19-line worksheet to calculate how much of their retirement benefits are taxable.

You might be surprised, Mr. President-elect, to learn exactly what “high income” means when it comes to paying tax on Social Security benefits. For regular income tax, married couples don’t reach the top tax bracket until they make more than $350,000. But if you collect Social Security, you’re a Rockefeller at $35,000.

There’s more: Every lawmaker, it seems, wants to get credit for helping middle-income families fund their retirement or send their kids to college.

The result? An absolute pileup of competing tax breaks.

Want tax help paying for child care? There’s a credit and an “income exclusion.” Pick one.

Mr. President-elect, you have identified a number of worthy things you want the government to help pay for: child care, college, clean vehicles and health care. And you want to accomplish all that with new tax breaks.

These are popular ideas. But I’m asking you – pleading, really – not to do it. If you want to fund a social program, go for it. But have the courage to do it directly. You’ll save millions of people many hours of work, not to mention tax-preparation fees.

President-elect Obama, we taxpayers need you to be brave. We need you to stare down the forces of obfuscation and call social programs social programs. If you can justify them, fund them. But don’t hide them in the tax code.

Kathy Kristof is a personal finance columnist at the Los Angeles Times.