Why We Need True Tax Reform

Part One of Two

Every year, about one in seven taxpayers wait until the final week to file their returns with the Internal Revenue Service (IRS). Whether you are part of that mad rush to the finish line this year, filed your 2016 return early, or filed for an extension, you no doubt are thinking there must be a better way for our government to collect taxes from its citizens.

Maybe you bought software to guide you through the process, or hired a professional to do it for you. Or perhaps you just spent hours doing it the old-fashioned way, surrounded by reams of paper and a calculator. So what does it cost to comply with U.S. tax laws?

According to experts who study our tax compliance burden, American individuals and businesses will incur this year anywhere between 6 billion to 9 billion hours of effort, at a cost of between $200 billion and $400 billion in direct fees and lost productive time. And these estimates exclude time for research, planning, and taxpayers defending themselves in audits.

Now consider that the federal government is expected to collect $2 trillion in total income taxes this year. That means Americans incur about 10 percent to 20 percent of that amount just to collect it. Startlingly, in the IRS’s own words in a report to Congress last year: “If tax compliance were an industry, it would be one of the largest in the United States.”

'Courtesy Disconnects'

But it’s not just taxpayers who bear the burden for the complexity of the tax code. The IRS does, too. Congress, as a result of sequestration and apparent concerns over the IRS targeting conservatives, has cut the IRS budget 17 percent since 2010. This has resulted in a corresponding drop in personnel, including 23 percent from its enforcement division.

And did you try to call the IRS in the past year? If you got through, congratulations: You were among the one in three callers who were successful.  In fact, were you aware that the IRS actually has an intentional policy to hang up on you if the hold time gets too long because they no longer have enough personnel? They even have a name for it: “courtesy disconnects.” In 2014, the IRS hung up on waiting taxpayers 544,000 times. In 2015, the number of “courtesy disconnects” skyrocketed to nearly 9 million calls.

Therefore, it should come as no surprise that the IRS recently announced that, in the past year alone, their taxpayer levies and seizures were down 40 percent, and their individual return audit rate fell 16 percent to a rate of only 0.70 percent of the approximately 150 million individual returns filed. Readers may feel jubilation at this turn of events; however, consider that the IRS’s very conservative estimate of a “tax gap” of close to $500 billion a year (amount of tax dollars raised versus what should be raised if everyone complied with basic tax laws) is not getting collected.

An Unsustainable National Debt

So now, we have Republicans controlling both chambers of Congress and the White House promising substantial relief in complexity and rates in order to stimulate the economy. (Whatever happened to the common sense justification that the code should be simplified because it is unnecessarily complex and a waste of national productivity?) Anyway, it appears the code is so complex that Congress now needs an added motivation to tackle its simplification—that our economy needs a stimulus to get us out of an anemic real GDP growth rate of barely 2 percent per year, leading to the creation of more meaningful jobs.

Moreover, increased economic growth is taking on a greater sense of urgency because we not only face $500 billion annual federal budget deficits, but the Congressional Budget Office (CBO) projects our deficits will hit nearly $1 trillion a year in five years and $1.5 trillion five years after that. As a consequence, their most recent forecast indicates that our national debt will double from the present $20 trillion to $40 trillion within 30 years. (Both the CBO and the Congressional Research Service have warned Congress about the non-sustainability of this forecast, and the probability of hyperinflation or default.)

So with all these reasons to substantially reform the tax code, President Trump and Congressional leadership plan to introduce legislation to address the issue. The details are still being worked out behind closed doors, but we do know something about the approaches they are considering.

In two weeks on the ilLUminate Blog, I’ll look at some of the ideas likely to be incorporated in legislation, and the effect they would have on our economy and our national debt.