Revenge of the Tax Code

[Charles_Main]

Revenge of the Tax Code

by Chris Edwards

Chris Edwards is tax policy director at the Cato Institute and co-author of Global Tax Revolution.

Added to cato.org on February 8, 2009

This article appeared in the Washington Post on February 8, 2009

If it were a movie, it would be called "Revenge of the Tax Code." The complex income tax, which has bedeviled average Americans for years, is biting back at the elite who helped create it. Tom Daschle, former chief lawmaker in the Senate, withdrew his Cabinet nomination because of an "unintentional" $128,000 tax mistake. Rep. Charles Rangel, chief tax-writer in the House, is also entangled in a tax scandal, as is Tim Geithner, the Treasury secretary, and Nancy Killefer, another high-ranking nominee who has withdrawn.

What is going on here?

Whether you believe the excuses of these folks or not, it's common for both taxpayers and the Internal Revenue Service to make big errors. "The question of what constitutes gross income remains a source of confusion for many taxpayers," according to the Taxpayer Advocate Service of the IRS. Daschle's mistake was to ignore the fact that all "accessions to wealth," or unearned income, including the benefits from his chauffeur, are taxable unless the code explicitly excludes them.

Rangel claimed that his error was due in part to "cultural and language barriers" and also stemmed from his failure to note that all foreign income needs to be reported, including the $75,000 he earned by renting his Dominican Republic beach house. It may be a bit hard to believe the 19-term congressman from New York when he claims, as he did last year, that "I never had any idea that I got any income." But the global sweep of the income tax does seem to surprise people. If you have a savings account in Mexico, that's taxed. If you move to London to work, you are taxed. Even if you scrap your U.S. citizenship and move to a mountaintop in Tibet, the IRS will still chase after you.

The IRS enforces a worldwide web of tax requirements, but it is a web full of holes. The Daschle, Rangel, Geithner and Killefer errors are part of the roughly $350 billion "tax gap" of unpaid taxes each year. The root of the problem is the intense complexity of the income tax. The labyrinthine code trips up many people who make honest errors, but it also makes it more difficult for the IRS to find cheats.

The Taxpayer Advocate Service has noted the "perversity" of tax complexity: "Taxpayers who honestly seek to comply with the law often make inadvertent errors causing them . . . to become subject to IRS enforcement. . . . On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities."

The income tax is a breeding ground for such loopholes because of its hugely inconsistent treatment of "income." A large amount of income is not taxed at all, while other income is taxed multiple times. In 2006, taxable income in the United States was just half of what the Department of Commerce reports as total personal income. While municipal bond interest goes untaxed, for example, corporate equity is taxed twice -- at the business level and at the individual level.

These sorts of inconsistencies foster aggressive tax planning by individuals and corporations. Enron, for example, capitalized on the different ways business income is treated, setting up partnerships, real estate investment trusts and other structures, and exploited the tax differences between them.

Read on here Revenge of the Tax Code

 

[auditor0007]

In the end, doesn't this make the argument for a less complicated system of taxation?

 

[Zoom-boing]

Revenge of the Tax Code

by Chris Edwards

Chris Edwards is tax policy director at the Cato Institute and co-author of Global Tax Revolution.

Added to cato.org on February 8, 2009

This article appeared in the Washington Post on February 8, 2009

If it were a movie, it would be called "Revenge of the Tax Code." The complex income tax, which has bedeviled average Americans for years, is biting back at the elite who helped create it. Tom Daschle, former chief lawmaker in the Senate, withdrew his Cabinet nomination because of an "unintentional" $128,000 tax mistake. Rep. Charles Rangel, chief tax-writer in the House, is also entangled in a tax scandal, as is Tim Geithner, the Treasury secretary, and Nancy Killefer, another high-ranking nominee who has withdrawn.

What is going on here?

Whether you believe the excuses of these folks or not, it's common for both taxpayers and the Internal Revenue Service to make big errors. "The question of what constitutes gross income remains a source of confusion for many taxpayers," according to the Taxpayer Advocate Service of the IRS. Daschle's mistake was to ignore the fact that all "accessions to wealth," or unearned income, including the benefits from his chauffeur, are taxable unless the code explicitly excludes them.

Rangel claimed that his error was due in part to "cultural and language barriers" and also stemmed from his failure to note that all foreign income needs to be reported, including the $75,000 he earned by renting his Dominican Republic beach house. It may be a bit hard to believe the 19-term congressman from New York when he claims, as he did last year, that "I never had any idea that I got any income." But the global sweep of the income tax does seem to surprise people. If you have a savings account in Mexico, that's taxed. If you move to London to work, you are taxed. Even if you scrap your U.S. citizenship and move to a mountaintop in Tibet, the IRS will still chase after you.

The IRS enforces a worldwide web of tax requirements, but it is a web full of holes. The Daschle, Rangel, Geithner and Killefer errors are part of the roughly $350 billion "tax gap" of unpaid taxes each year. The root of the problem is the intense complexity of the income tax. The labyrinthine code trips up many people who make honest errors, but it also makes it more difficult for the IRS to find cheats.

The Taxpayer Advocate Service has noted the "perversity" of tax complexity: "Taxpayers who honestly seek to comply with the law often make inadvertent errors causing them . . . to become subject to IRS enforcement. . . . On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities."

The income tax is a breeding ground for such loopholes because of its hugely inconsistent treatment of "income." A large amount of income is not taxed at all, while other income is taxed multiple times. In 2006, taxable income in the United States was just half of what the Department of Commerce reports as total personal income. While municipal bond interest goes untaxed, for example, corporate equity is taxed twice -- at the business level and at the individual level.

These sorts of inconsistencies foster aggressive tax planning by individuals and corporations. Enron, for example, capitalized on the different ways business income is treated, setting up partnerships, real estate investment trusts and other structures, and exploited the tax differences between them.

Read on here Revenge of the Tax Code

Once again, Government: Redefining stupid. Daily

Nice find.

 

[Zoom-boing]

In the end, doesn't this make the argument for a less complicated system of taxation?

Absolutely. Translation: Nothing will change.

 

[KGB]

both my state & local tax returns are flat taxed & it takes all of 5 minutes to fill out the form.....why the IRS insists upon this nightmare is beyond all rational thought.....

 

[auditor0007]

both my state & local tax returns are flat taxed & it takes all of 5 minutes to fill out the form.....why the IRS insists upon this nightmare is beyond all rational thought.....

A flat tax you say? Simple you say? Just a standard deduction and exemptions for the members of your family? That would not be a good thing on the federal level. Just think of all the accountants and attorneys who would be out of work.