Tuesday, January 09, 2007

Changing The Tax System

As you know, there will be big debates as to tax reform. The Democrats want to tax the rich and the Republicans want to help business. You can count on one thing: A real messy tax code. You will hear a lot about tax reform--and that includes tax reform on the state level. Take this CPA's word for it: Ain't gonna happen (with apologies to my English teachers).

I graduated with a degree in accounting from the University of Florida in 1975. Back then, we heard about plans to reform the tax code. The study issued by the Feds was just one volume. Just ten years later, the same study which was a guide for tax reform and simplification was three volumes (I still have them. It's great reading if you have insomnia, but they had some really cool graphs for us number addicts.) . Today, the same study would take six volumes. Believe me, it's the biggest mess you'd ever want to see.

When I was in college, there were no income phase-ins and phase-outs on deductions and credits. Today, there are a lot of those. The reason? The GOP wanted to give away some tax goodies and reductions, but the Democrats wanted to do that only for the poor and middle class. Thirty years ago, the average person could do his own tax return. Today, that same person would be a fool to do it.

I have a CPA friend who told me when he went into public practice in 1961, the Code was a small volume and you could actually memorize it. Now it's three volumes and you have a basic knowledge if that. Do you know there are lawyers that actually spend their entire careers studying just one or two sections of the tax code? I am not joking.

Here's another little thing people don't know. The IRS tax forms issued for this year are missing a lot of things that were changed late in 2006. Congress passed a tax law just two weeks before the end of the year. The new forms DO NOT reflect those changes. If you are doing your tax return, you are going to have fun. Is it complicated? Does the sun rise in the east and set in the west?

So for the next two years, there'll be a lot of blather about tax reform and simplification. The Democrats and Republicans will be debating it until the cows come home. You can rest assured there will be some changes. But simplified? You can forget it. There will be tax cuts for the middle class and the poor, but there will be those income phase-ins and phase-outs.

For the 2008 tax season, there will be a Schedule O to fill out. All the adjustments to income and all the tax credits will be on that form. What fun. That's to make pages 1 and 2 of the 1040 easier. But it won't be for the average taxpayer.

If the tax code was to be simplified, what would you be willing to have eliminated? Mortgage interest? Forget it. State income taxes? The high tax states such as California and New York would screech. Charity? The non-profits and churches would yell. The child tax credit? Young families would whine. Retirement plans? The investment industries would raise cain. College tuition? Parents who send their child(ren) to college would pitch a fit. Whose ox are you going to gore? What goodie are YOU willing to give up?

Remember: If doing tax returns was easy the homeless would be doing them. I predict to you it will be a lot more complicated in the years to come. But if you hear any of this talk about tax simplification, it's all talk and nothing else. No party has the guts to really simplify and reform the code. They can't afford to anger the special interests. The GOP lost Congress in 1954 and the Senate in 1986 when they reformed and simplified the tax code (Yeah, they simplified it beyond all comprehension.).

Besides, we CPAs thrive on this mess. Simplify it. We can use the mass confusion it'll bring.


Cliff Brown said...

Growing up I always had income from only one source. I would get my w2 form and fill out a 1040ez. I never really thought about tax very much. Now I own a business which complicates things a lot. The combination of running a business and running for office got me watching tax much closer. Somewhere along the way I decided that the fair tax system would be the best solution to the federal tax problem. I made a donation to the cause and they said I am now a memember of the fair tax movement.

As time went on I looked closer at fair tax (national sales tax, end income tax and close the IRS) The closer I looked the more I liked it so I became more involved. Somewhere along the way I ended up becoming a district director and acting state director. I was writing letters and lobbying groups like the farm beauro. I was by far the most active fair tax worker in the state.

I still think that it is a good idea but one thing is clear. It aint gonna happen. There are far too many people other than accountants who actually benifit from a complicated tax code. That is the cover used by democrats who want to finance social experiments and republicans who want to do favors for buddies.

I have not totally given up on some sort of simplification, but my focus is now on just cutting any tax any where I can find something that can get cut.

Cliff Brown said...

ps. Please visit fairtax.org