To: John Koskinen
Dear Commissioner Koskinen:
Having just completed my income tax return, I am enclosing a copy of this column. This year, 153 million returns will be filed, and every single one of them will be signed by someone who knows that our current tax system is an embarrassing mess.
And what a mess it is. Since 2001, over 5,900 changes have been made to the U.S. code. That is an average of more than one “simplification” a day. Taxpayers have to spend more than 6 billion hours to comply. A study based on Bureau of Labor Statistics data estimated that the cost of complying with income tax filing requirements for 2015 amounted to $195 billion—or more than 10 percent of the entire aggregate income tax receipts for that year.
The Individual taxpayers like the undersigned find that it is impossible to prepare one’s own taxes. According to IRS Compliance Data Warehouse figures for the year 2014, 54 percent of all individual taxpayers were so overwhelmed that they had to pay someone to do the job for them.
A major cause of this complexity is the unfortunate fact that the federal government “spends” more money through the tax code than it spends through the more transparent appropriation process. Federal appropriations for 2016 were approximately $1.2 trillion, while tax expenditures amounted to more than $1.4 trillion. These tax expenditures take the form of various tax benefits like deductions and tax credits. According to a Treasury Department report by the Office of Tax Analysis, the existing tax code contains more than 200 tax benefits that can be claimed by individuals and businesses. Few, if any, individual taxpayers are familiar with all these benefits. Most preparers are not familiar with all of them either.
Let’s take a look at the usual standard versus itemized-deduction decision that all individual taxpayers make. An individual taxpayer may elect to either itemize or not, depending on which one will reduce their tax bill most. A study by the Government Accountability Office concluded that potentially 2.2 million taxpayers who claim the standard deduction would have paid less had they itemized. A system this complicated that produces these results is nothing short of scamming one’s own citizens. Or overcharging them for wars long since over.
In 1898, to help pay for the Spanish-American War, a tax was imposed on wealthy Americans’ phone service, back when it was considered a luxury. We may “remember the Maine,” but the Treasury Department forgot to end the tax. Ultimately the tax was ruled illegal. The Treasury announced that it would rebate $15 billion to U.S. taxpayers. Thus, in 2006, taxpayers were permitted to claim a one-time tax credit for their telephone excise taxes. The credit ranged from $30 to $60. No substantiation was required by the IRS. In essence, this credit was “free money.” The IRS Division of Research Analysis & Statistics found that 28 percent of eligible taxpayers did not claim that credit, and further, that 16 percent of returns prepared by a tax preparer also failed to claim the “free money.”
The tax liability of an individual or business should depend solely on how much is owed under the applicable law, and not on that taxpayers’ expertise in the law. In a 2012 taxpayer survey conducted for the Taxpayer Advocate Service, 73 percent of respondents said that the wealthy have ways of “minimizing their federal taxes not available to the average taxpayer.” In a country where a claimed billionaire president has made billions but not paid a penny in taxes for 30 years, one can understand this reaction.
So while this letter comes with my “annual contribution,” let us consider three principles of tax reform.
If Congress were to eliminate all tax expenditures, it could cut individual income tax rates by 47 percent. Citizens would not be conned or gamed anymore, and the IRS could administer a much simpler and fairer tax regime. It’s also about time that we know what we are paying for.
A frequent annual recommendation of the National Taxpayer Advocate is that Congress should direct the IRS to provide each taxpayer with a “taxpayer receipt” detailing where the money goes. This recommendation, in spite of its frequent submission, has yet to be adopted by Congress. Must be an oversight by our elected representatives.
Just as we taxpayers should know what our money is buying, we should also have budget continuity and audited expenditures. Here, we could look north to the province of Ontario. A recent tax/budget reform requires an annual budget and a three-year projection of that budget. At the end of that period, an outside audit firm is retained to audit government expenditures. The concept of holding elected leaders to a budget that they have been required to project beyond the time of the next election and to audit those results independently appeals to this taxpayer. Wonder if it would appeal to any of our elected leaders?
It is remarkable that none of the people who we elect to represent us taxpayers ever address simplification, transparency or accountability when it comes to our tax code. Can these be unintended consequences?
And one final word, Commissioner Koskinen: This year, do read all of the report and recommendations from the National Taxpayer Advocate.
Vance K. Opperman
Fan of the National Taxpayer Advocate
Vance K. Opperman (email@example.com) is owner and CEO of MSP Communications, which publishes Twin Cities Business.