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End Our Nightmares Of Complexity

Having trouble figuring out your taxes? Don’t feel like you’re alone.

Money magazine sent a hypothetical family’s tax information to professional tax preparers and asked them to calculate the tax bill. Of the 45 who responded, not one found the right answer, and fewer than one in four came within $1,000 of the correct figure.

How did the president and Congress react to this shocking revelation? They made a bad situation worse. Last year’s tax bill, which should be renamed the Tax Lawyers and Accountants Enrichment Act of 1997, was a nightmare of complexity. The legislation created 285 new sections of tax law and amended 824 others. Even the provisions that help taxpayers, such as the reduction in the capital-gains tax rate, are a mixed blessing. The form required for calculating your capital-gains taxes more than doubled in size, to 54 lines of mind-numbing clutter.

The consequences of this new complexity are revealed in a new survey in Money’s March issue. Once again, the magazine sent a fictional family’s tax return to a random sample of tax experts. The results are almost impossible to believe. Of the 46 professional tax preparers who responded, not only did none come up with the right answer, no two came up with the same answer.

The gap between the highest and lowest estimate was an incredible $34,672. Nearly two out of three professionals, it turns out, overestimated the family’s tax bill, with an average overpayment in excess of $7,000! The 16 tax preparers whose estimates were too low missed the mark by an average of $1,080. The “winner” of the test, by the way, would have had the family pay the government $610 more than necessary.

With 17,000 fine-print pages of laws and regulations, the U.S. tax code baffles even the IRS. Once again, Money magazine deserves praise for doing the investigative work. It had reporters call up the IRS hotline and visit customer service centers to get answers to a number of questions typical of what you and I might need to ask.

The calls to the IRS hotline often were an exercise in frustration, resulting in busy signals, endless waits, and disconnections. When the reporters did get through, they were given incorrect information 22 percent of the time. Reporters who had face-to-face meetings in customer service centers fared even worse, receiving wrong answers to 40 percent of their questions.

Vice President Al Gore’s solution (this is not a joke) is to have the IRS answer a higher percentage of its calls and extend the hours at customer service centers.

To add insult to injury, individuals who rely on inaccurate IRS information are held legally responsible for those mistakes. And woe to the taxpayer who gets in a dispute with the agency. Taxpayers who tangle with the government are presumed guilty until they prove themselves innocent. Murderers, rapists and muggers are protected by the Constitution and Bill of Rights, but taxpayers are out of luck.

The current tax code is bad news for the economy as well. According to the Tax Foundation, private-sector compliance costs - the amount of money the economy loses because of time wasted filling out tax forms and money spent on tax lawyers and accountants - come to $157 billion per year. Even the Clinton administration’s new budget estimates that compliance costs have reached $134 billion.

The real problem with the tax code, however, is not the IRS. The agency is only following orders. Nor should accountants or other tax professionals be blamed. They’re just trying to earn a living. The reason our tax code is a nightmare is that politicians have spent 85 years manipulating it. Our tax system has become a special-interest Disneyland, riddled with social engineering and back-door industrial policy. The complexity added by last year’s tax bill is the latest example of why the current system is beyond saving.

The only solution is to start over. Congress made the tax code and it can make another one. Nothing is etched in stone. If America is groaning under a tax code that doesn’t serve its best interests, there’s no reason Congress can’t do something about it.

We should replace today’s tax code with a simple, fair system like the flat tax, which would treat everyone equally. The 569 forms needed to comply with the current system would be replaced by two, simple, postcards, one for individuals and one for businesses. The crazy quilt of loopholes, exemptions and allowances would disappear and everyone would pay 17 percent on any income above a generous allowance based on family size. By increasing economic efficiency, this would give a huge boost to the U.S. economy, and hence, to all Americans.

And it would save us all a lot of money and a huge headache at tax time.

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