Tuesday is tax day.
The marvels of electronic filing may have lessened somewhat the demand for postal locations with employees on hand to make sure late mailers get their envelopes date stamped before midnight, but there still will be many laboring to the last minute to make sure returns are on their way to the IRS in order to avoid a penalty. While April 15 is the filing deadline, the typical taxpayer will not have yet earned enough money in 2014 to pay his tax bill. “Tax freedom day” – the date recognized each year as the point at which a typical worker will have earned enough to pay all taxes – is set at April 21 this year, three days later than last year. That means most of us work nearly a third of a year just to meet our obligation to the taxman.
According to numbers compiled by Paul Ryan, chairman of the U.S. House Budget Committee, the cost of complying with the demands of the nation’s tax code is more than $160 billion a year. That’s not the cost of the taxes paid, but rather the cost of all those things that go into compiling and filing annual returns. Beyond the financial cost, the process is estimated by Ryan to take some 6 billion hours of work each year. Imagine the problems we could solve as a nation with an extra $160 billion a year and 6 billion hours of time.
Ryan and others are at the forefront of efforts to reform the nation’s tax code, which has grown to be so massive that no one knows all its nooks and crannies. Two of the most frequently discussed options for changing how the nation collects taxes are the “flat tax” and the “fair tax.” The flat tax would take much of the mystery out of the tax code by having taxpayers pay a certain percentage of their income no matter what; the fair tax would generate revenue based on spending for consumer goods rather than income earned.
Both have been the topics of debate and study for many years, yet neither has gained the sort of momentum necessary to move to forefront as the sort of sweeping tax reform around which the nation will rally. Many of those who like the idea of reform are less than passionate about either option.
It is almost impossible to argue that the tax code does not need reform. The last big revamping of the nation’s tax system was in 1986, when the national economy, and the world, looked dramatically different than it does now. However the income tax itself, which is the cornerstone of the system, has been in place for just over 100 years. Originally the nation’s tax code was fewer than 100 pages; now it encompasses some 74,000. Who understands it all? No one. Paid tax preparers routinely make mistakes. A recently released study by the Government Accountability Office reviewed the work of 19 individuals paid to prepare personal tax returns. Of those, 17 made mistakes. But then, even the IRS doesn’t understand the code, as it routinely provides inaccurate information itself.
Our tax system provides incentives for businesses to keep billions in accounts outside the U.S. It is punitive in nature to individuals. It is so complex that those expected to understand it don’t always agree on what it says. It has fostered an entire industry of businesses that exist solely to interpret and explain the tax laws. Reform is overdue and desperately needed. And yet it’s hard not to think about the fact that reforming health care has been a priority in Washington of late, and the result is the Affordable Care Act. We might need to be careful what we wish for.