Don't Bother Waiting for Real Tax Reform

Unfortunately, true tax reform is a will-o'-the-wisp that we like to talk about but will likely never see because there are so many varied special interests encoded that we will never willingly give up our personal pet deductions.

"As the night follows the day..," in the spring a young man or woman's fancy turns to thoughts of … deductions. Yes, it's that time again for a mandatory collage of some thoughts on this most American of institutions — the self-reported, "you can trust me," annual income tax return.

People around the world are often amazed when they learn of this annual ritual that we love to hate. They are amazed because of the high rate of accurate, on-time work that citizens of every stripe deliver after much personal sweat and personal cost. Because of ingrained corruption and epic bureaucratic inefficiency that exists in many countries around the world (you think we have it bad? Hah!), many foreigners can hardly imagine how and why we do it the way that we do it.

According to a recent Wall Street Journal article, our federal tax code has now swelled to an incomprehensible four million words — a document one foot thick — the creation of which my CPA wryly calls the "Accountants Guaranteed Employment Acts." In fact, 57% of the 143 million tax returns filed last year were prepared by experts of some stripe. No unemployment in that line of work, if you can stand it.

Another amazing fact, to foreigners and American financial types alike, is that 111 million of those returns yielded a refund on over payment of tax withholding. Now ask yourself, why in the world would you want to loan the Feds your hard-earned dollars at no interest? Especially when you can adjust your withholding to get closer to a net wash, little money owed or returned?

It turns out that some of the reasons are obvious: some people don't know that they can make this adjustment; some don't know how to do it; and some just don't care. The most surprising finding of such a survey is how many people actually want to get a refund. They use this average $3,000 or so for enforced savings or, unfortunately more commonly, to pay for a splurge, such as a vacation, that they are unable or unwilling to budget for.

By the way, these refunds last year totaled over $325 billion in loans to the Feds that at least we didn't have to pay the Chinese interest on. Just think how much worse the deficit would be from additional interest payments if this huge annual under-the-radar subsidy had not existed all of these years.

The WSJ also published the gossipy number of people with reported annual income over $1 million (282,311), $10 million (11,264) and the fact that about 7,000 millionaires (income) paid no tax at all. The average rate that everyone paid was at about 12% with folks over the $500,000 level averaging about 25%. A sadder number was that 890,000 people took a gambling loss deduction. Presumably the ones that they could prove.

What does it all mean? It means that true tax reform is a will-o’-the-wisp that we like to talk about but will likely never see. A simple 15% flat tax Malcolm Forbes, Jr. touts? No way. Too many oxen will be gored, such as the aforementioned CPAs who feed at the trough of complexity. One key aspect of our "something for everyone" tax structure is that there are so many varied special interests encoded that, collectively, we will never willingly agree to give up our personal pet deductions. Like our gambling friends, for instance.

And with communication being instant and ubiquitous nowadays, our non- and/or malfeasant Congress apparently cannot get the time and space away from the media, lobbyists and constituents to work any deals in private, which seems to be the missing essential for them to function. And there is always the Law of Unintended Consequences lurking whenever these folks actually do anything.

Maybe my acceptance of their inactivity to simplify the tax code is just a cold comfort rationalization to force myself to get up and go back to my pile of receipts and canceled checks.

Happy Spring.