Does Tax Time Need To Be So Taxing?

If there is anything that unites politicians and the general public it's the belief that the U.S. tax system is too darn complicated. Yet somehow the process of paying taxes has resisted almost every attempt at simplification. It's an amazing paradox: The one thing we all agree on seems to be the one area where it is virtually impossible to make progress. What's going on?

Let me start by saying that I am not referring to fundamental changes in tax policy, such as the introduction of a "flat tax" or replacing incomes taxes with a national sales tax. While these proposals may simplify the process, for this post I'm assuming that we will continue to have a tax system with different rates for different income levels.

However, within our current system, even the Commissioner of Internal Revenue Service, Douglas Shulman, admits that he uses a professional tax preparer for his returns because the tax code is too complex. Thus it is no surprise that virtually every president and every Congress for the last 20 years has vowed to simplify taxes, including President Obama. Almost a year ago, he condemned what he called the "monster tax code," which has grown to more than 5600 pages and 3.7 million words. To slay this monster, he asked Paul Volcker, chairman of the President's Economic Recovery Advisory Board, to appoint a tax reform task force that would develop recommendations by the end of 2009. But to date the task force has not presented anything.

Meanwhile, other proposals have been tossed on the table, the latest a bipartisan plan by Senators Judd Gregg (R-NH) and Ron Wyden (D-OR). And the chances of this bill passing? You get the point.

So, I ask again, what's going on? Here's one possibility: Over the years, the government turned the tax code over to technical experts, who wrote the regulations, forms, and processes in their own language without regard for the end-user, the citizen, who would be required to use them. As the language and process became more and more arcane, fewer end-users could actually do their own taxes, so an industry of "tax preparers" formed to provide an interface between the tax payer and the taxing authorities. It is estimated that there are at least one million tax preparers in the United States; and that this year 60% of all taxpayers will use a professional and another 20% will use tax preparation software (another industry). In essence, the government has created a process for citizens that most citizens can't navigate.

Now if the government was a private sector company, and there were competitive alternatives, many of the alienated and disenfranchised customers would have gone elsewhere. But there is no alternative to paying taxes — so the pressure for reform doesn't really exist as it would with a private company. At the same time, the industries that the technical tax process has spawned are now very powerful, with significant lobbying and communication ability. It's in their best interest for the tax process to continue to be complex, and therein lies the cause for the stalemate.

There is, however, a glimmer of hope for simplification. Oddly enough, it comes from the IRS itself. There is nothing to stop the IRS, if it has the will and courage, to simplify the language and process of paying taxes. And in the past year, under the leadership of Commissioner Shulman, positive steps have indeed been taken in that direction. For example, more than half of all 2009 returns will be filed electronically, a process that the IRS has finally embraced. The IRS has also set up a permanent "Office of Taxpayer Correspondence," which identifies and acts on ideas for simplifying communication and has already streamlined various tax collection "notice letters" and inserts. The IRS also is beginning a process of certifying professional tax preparers, which is probably a good thing (even if it reinforces the power of the technical industry).

To be sure, filing taxes is still a long way from simple. But a little bit of progress is certainly better than no progress at all. 

Source :http://blogs.hbr.org/