The Case for Overhauling a U.S. Tax System Even Congress Doesn't Understand

Simplifying the tax system would save everyone a whole lot of money and a whole lot of time.

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By Sam Dealey, Thomas Jefferson Street blog 

"The monopoly on good ideas does not belong to a single party," President-elect Obama reportedly told congressional leaders Monday during a private meeting about an economic stimulus package. "If it's a good idea, we will consider it." 

When it comes to taxpayer money—raising, spending, and occasionally deigning to return it—neither party in Congress has demonstrated particularly good ideas lately. The majority of lawmakers seem to believe that stimulating the economy means expanding recurring welfare programs, plowing money into pet projects of only limited or short-term use, and bestowing inadequate, selective tax cuts.

But if Obama is looking for ideas, he might consult with Nina Olson, the national taxpayer advocate at the IRS. In her annual report to Congress, released yesterday, Olson makes a persuasive case for overhauling the U.S. tax system.

"The largest source of compliance burdens for taxpayers, and the IRS, is the overwhelming complexity of the tax code," Olson writes. "The only meaningful way to reduce these burdens is to simplify the tax code enormously."

It's common sense and worth a read, but a few figures stand out:

  • Americans spend 7.6 billion hours annually trying to figure out their federal taxes. Working eight-hour days, five days a week, 50 weeks a year, that's the equivalent of 3.8 million full-time workers.
  • At the average hourly wage of $27.54, that tax-preparation time amounts to $193 billion, or 14 percent of aggregate income tax receipts.
  • A staggering 60 percent of individual taxpayers are so bewildered by the tax code that they hire outside preparers. An additional 22 percent buy computer software.
  • The bottom line: Paring the tax code's 3.7 million words to something comprehensible would effectively return money to the taxpayer at no "cost" to the government. Individual taxpayers could do something else with their time, the small-business owner could concentrate on creating income, and the IRS (and, consequently, the taxpayer again) could spend less money on compliance and enforcement. Heck, taken all together, tax receipts from a simplified tax system might actually rise.

    But if Obama and Congress still aren't convinced after reading Olson's report, they should consider the sorry case of one of their own: Even Rep. Charlie Rangel, chairman of the nation's top tax-writing committee, can't understand the basics of the tax code.

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