Simplifying federal tax code is no simple matter

Author: Mary Deibel

Published: January 31, 2005

It's one thing for President Bush to campaign against the "mess" of a U.S. tax code and name a blue-ribbon commission to study ways to make it "simpler" and "fairer." But it's quite another to enact a simpler, fairer tax code.

"It's easy to say you're going to wipe out hundreds and hundreds of provisions in tax law, but it's tough to say how you're going to do it and what you'll replace them with," says Eugene Steuerle, a former Treasury official who helped draft the historic 1986 tax overhaul that closed loopholes, killed shelters and otherwise simplified the tax code.

With Bush promising that any tax overhaul plan will be "revenue neutral," collecting no more taxes than it cuts, "one piece has to be raising someone's taxes, and that's politically difficult," said Douglas Holtz-Eakin, a Bush White House economist who now heads the Congressional Budget Office.

Tax breaks have proliferated since the 1986 reform: The tax code, plus regulations and court rulings to carry it out, has exploded from 31 pages when it was first published in 1913 to 61,225 pages today. That's more than double its size at the time of the 1986 revamp with 15,562 pages added since George W. Bush became president in 2001.

The upshot is that six in 10 taxpayers turn to professional tax preparers for help, with millions more buying tax software packages and using online programs.

"Without a doubt, the largest source of compliance burdens for taxpayers and the IRS alike is the overwhelming complexity of the tax code," IRS Taxpayer Advocate Nina Olson contended. "And without a doubt, the only meaningful way to reduce these compliance burdens is to simplify the tax code enormously."

Olson's 2005 report notes that education tax breaks take 83 pages to explain if you qualify, while the dozen options for retirement savings plans depend on your income level, where and if you work, and whether or not you have a pension plan.

She would start by repealing the parallel tax system known as the Alternative Minimum Tax. Olson knows firsthand this is "the elephant in the room" because she got bagged last year by the Alternative Minimum Tax, which has you fill out a 12-line worksheet, read eight pages of instructions and complete a 55-line form simply to determine if the Alternative Minimum Tax applies to you.

Enacted by Congress in 1969 in response to taxpayer outrage that 155 super-rich Americans paid no tax, the Alternative Minimum Tax hasn't been adjusted for inflation like regular income tax brackets have been, and now hits 2.4 million taxpayers, including people from states with high state and local taxes or folks with big capital gains.

Absent major change or repeal, the Alternative Minimum Tax is projected to catch almost 35 million households -- or 1 in 3 Americans -- by 2010, including people making as little as $50,000 a year.

The president's fiscal 2006 budget, due next Monday, was supposed to recommend a permanent fix. But between Bush's priority -- permanent extension of his tax cuts -- and the delay over tax simplification while his blue-ribbon panel develops options, no final fix is imminent.

Permanent repeal of the Alternative Minimum Tax would cost $600 billion the first 10 years, the nonpartisan Tax Policy Center estimates, and that total isn't included in the $3.5 trillion, 10-year cost of permanently extending the Bush tax cuts.

A further complication confronting taxpayers is that many states no longer conform to the federal tax code, requiring taxpayers to start from scratch when reckoning state taxes rather than have them automatically follow federal tax rules, according to tax publisher CCH Inc.

"Beginning with federal tax cuts made in 2001, states have increasingly decoupled their systems to keep their revenues from falling further," said CCH senior state tax analyst John Logan.

All is not lost, however: Last year's tax law changes included a simplified definition of a child, down from five definitions by age and family income required for eligibility for various tax credits, deductions and tax-favored savings accounts.

And more taxpayers will qualify for shorter IRS 1040 forms this year, going a long way toward making good on the promise to make taxes so simple that "you can fill it out on a postcard."

* Income limits for short forms 1040EZ and 1040A increase from less than $50,000 to less than $100,000. The 1040EZ is for taxpayers with no dependents, no adjustments to income, and no tax credits other than the Earned Income Tax Credit. The 1040A is for nonitemizers with few income adjustments and limited tax credits.

* The self-employed can use IRS short form Schedule C-EZ if their business expenses are no more than $5,000, up from $2,500 last year.