In 2008, Timothy Geithner was nominated for U.S. secretary of the Treasury. He was voted in by the U.S. Senate, and served from 2009 to 2013 under President Barack Obama. It was later discovered that, even as a trained economist and monetary expert, he had underpaid his taxes in the previous decade by $34,000. This is a man who studied at both Dartmouth College and Johns Hopkins University, yet the mistakes in his tax forms were attributable to his own misunderstandings about his tax status.
If a person preparing to become Treasury secretary cannot understand the tax code, how can the rest of us be expected to do so? There are even times when I sit with tax specialists who remind me that no one really understands the whole of what Congress has created.
In 1913, the entirety of the United States tax code was published in 27 pages. Today, the same consists of more than 4 million words spanning over 9,000 pages. Between 2001-2012 alone there were more than 4,600 changes made to the code. That’s more than a change a day for 11 years, but condensed into less than 36 months. These changes include, but are not limited to: late fees for overestimating your taxes; late fees for underestimating your taxes; and the classification of the NFL, NHL and PGA tour as nonprofit organizations, despite the fact that they take in millions in profits and revenues. One of the really amazing parts added to the tax code describes how, if you win a lawsuit and pay contingent legal fees, you can end up being taxed at a level that is higher than the payout you receive.
In recent weeks, and seemingly for many years, Republicans and Democrats have debated the subject of tax reform with little or no progress being made nor consensus being reached. Democrats say, among other things, that the solution is a bigger IRS budget — while Republicans argue for a smaller one. Perhaps there is an alternative solution: why not simplify the whole darn code?
I know that many accountants and lawyers are employed because of the complexity of our tax system. I do not hold a grudge against them. But someone has got to have a good idea about how we could gainfully employ the legions of tax specialists who would become unemployed if the tax code were simplified. They could go to work helping people who are in poverty start companies and become self-reliant. I would have no problem if these same tax specialists worked and were paid through grants to assist the poorest of the poor. Who knows? Maybe some of the tax specialists would have even more satisfying work and life experiences.
It is always difficult to choose which of certain tax laws should be abolished. Nor has anyone I know come up with a good estimate of how much of the tax code could be abolished over time. But it has to be that a significant percentage of all the laws could be left to sunset.
If I had to choose one set of laws that could slide into non-existence, it would be the mortgage interest deduction that homeowners receive. This was worth $379 billion to the taxpayers who took the deduction in 2013. One could argue the individuals who took advantage of this element of the code were simply acting upon an inclination to pay as little tax as possible. Many would say this is the way it should be. I, on the other hand, would posit that the mortgage deduction simply tilts the economy toward more and bigger houses, and adds to an overall inclination in our society that favors — through the tax code — those who own. Furthermore, the mortgage interest deduction adds to the complexity of the tax code.
Maybe it’s time for those running for office to make simplification of the tax code an issue in the upcoming national elections.
See the Tax Policy Center’s Ways to Improve the Tax System: Act Now
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development.
Madison Savoie, Hoffmire’s colleague at Progress Through Business, did the research for this article.