I.R.S. Ombudsman to Congress: Tax Code is Too Complex

More than half of Americans know the pain and cost associated with preparing taxes every year.  Nina Olson, an ombudsman for the Internal Revenue Service, agrees.

The New York Times printed an article that summarized some of Ms. Olson’s comments to Congress in her annual report

Nina E. Olson, the national tax advocate who acts as an ombudsman for the I.R.S., issued a sweeping criticism of federal tax policy in her annual report to Congress. Ms. Olson found that the volume of the tax code had nearly tripled in size during the last decade — to 3.8 million words in February 2010 from 1.4 million in 2001. She estimated that Americans spent 6.1 billion hours preparing their returns each year — the equivalent of 3 million employees working full time.

That’s 6.1 Billion man/hours working to produce .. nothing.

Flat tax sympathizers like  FreedomWorks have been touting the need to simply our tax code for quit some time.  Here’s FreedomWorks’ Dick Armey to explain the idea.

An alternative to the flat tax is the fair tax supported by fairtax.org. Either of these two plans would greatly reduce the complexity in our tax code, which is badly needed.  As the New York Times article demonstrates, the I.R.S.’s own internal watchdog agrees.

“The time for tax reform and tax simplification is now,” Ms. Olson said.

What may be a bigger surprise in the article is that the greedy wealthy corporate banker tycoon rich people that progressives have been complaining about, aren’t actually the biggest benefactor of our tax code – it’s the average working stiff.  The ombudsman’s report continues by saying:

“The dirty little secret is that the largest special interests are us — the vast majority of U.S. taxpayers,” the report said. “Virtually all of us benefit from certain exclusions from income, deductions from income or tax credits.”

The report makes an invalid presumption here.  Yes, almost all of us would pay more in taxes if there were no exclusions or deductions.  Lower-income earners would not have the earned income credit, child tax credit or many other tax provisions that help create our highly-progressive tax system.  Middle-income earners would not have the mortgage interest deduction, tax free retirement investments, exclusions of income used to pay for employer-based health care, etc.  High income families would lose tax shelters, deductions for charity.  Everyone would lose the dependent deduction and standard deductions.  Sure, we would all pay more if there were no deductions or exclusions.  That is not the same thing as saying we would all pay more under a flat or fair tax.

Under a flat tax system, there are no deductions.  It doesn’t matter how many kids you have, if you own a home or not or whether or not your employer pays for your health insurance.  You pay a certain percentage of the money you earn – period.  The difference is that the rates could be greatly reduced for everyone because more people would be paying taxes.

A CNN article lays out one problem with our tax system.

If tax year 2009, for which we are paying today, is anything like tax year 2008, then a record number of the nearly 142 million Americans who will file a tax return will get back every dollar that was withheld from their paychecks during the year.

That’s almost half of all working-age Americans that can vote, but pay ZERO taxes.  Even if actual tax rate was 5%, thet would be more than 150 Million taxpayers now actually paying taxes.  So even without deductions and exclusions, more money would flow into the coffers of the treasury with most taxpayers paying the same taxes.  The difference is that no one spent much of their time to hide, deduct, exclude, record, document and report their income while trying to understand all 3.8 Million words of the tax code.

The report also considers the increasingly complex job the I.R.S. is going to have to perform thanks to Health Care Reform turning them into enforcers of the insurance mandate.  The changes in how the I.R.S. will certainly be more expensive than the C.B.O. estimated.  Then again, the C.B.O. has underestimated the costs of just about everything that it estimated in the last two years – especially where health care reform was concerned.

Our tax system is overly-complex, incredibly expensive and has now become unmanageable.  This year, the I.R.S. had to move the tax deadline back three days just to deal with the fact that nothing was changing in the existing income tax code.  That’s right, because the income tax schedule will continue just like it was from 2010, they needed more time.

The I.R.S. is a bloated and unnecessarily over-manned government institution.  Not since 1986 has the tax code had a major revision.  Nina Olson has it right:  Congress, shrink the tax code.. now.