14 March 2006

How Long Is The Tax Code?

How Long Is The Tax Code?

[I]f you go to the US Government Printing Office ( www.gpo.gov ), you can order a complete set of Title 26 of the US Code of Federal Regulations (that's the part written by the IRS), all twenty volumes of it, at the bargain price of $974, shipping included.

According to the US Government Printing Office, it's 13,458 pages in total. The full text of Title 26 of the United States Code (the part written by Congress--available for an additional $179) is a mere 3,387 printed pages, bringing the adjusted gross page count to 16,845.

From here.

Don't trust Republicans to give you the straight story on this one, however:

U.S. Representative John Hostettler (R-IN) [Too Short]

"the Internal Revenue Code and regulations add up to one million words and is nearly seven times the length of the Bible"

U.S. Representative Rob Portman (R-OH) [Too short]

"The income tax code and its associated regulations contain almost 5.6 million words -- seven times as many words as the Bible. Taxpayers now spend about 5.4 billion hours a year trying to comply with 2,500 pages of tax laws...."

U.S. Representative J.C. Watts, Jr. (R-OK) [Close To Right]

"The heart of IRS abuse lies in the existing tax code. Most of the folks who work for the IRS are good people just trying to do their job, but they are caught in a bad, overextended tax system. At 3,458 pages, twice the length of the Bible, it's impossible for the average taxpayer to know, understand, and accurately apply its provisions. The length is twice that of the Bible! Even tax experts cannot do so reliably."

U.S. Representative Spencer Bachus (R-AL) [Too long]

"With its 6,000 pages and 500 million words, the complexity of our tax code is the prime source of frustration and anger felt by millions of Americans toward their government."

U.S. Representative Bill Archer (R-TX) [Too short]

"The Internal Revenue Code and regulations now come in at one million words and 9000 pages."

U.S. Representative Jo Ann Emerson (R-MO) [Too short]

"The Bible, the guide of our lives, is 1,291 pages and contains 774,746 words. But the Tax Code and its regulations which are referred to by some as, 'a person's worst nightmare come true' is 9,471 pages and over 7 million words."

U.S. Representative Vito Fossella (R-NY) [Moderately too long]

"the tax code runs 17,000 pages and contains a mind-boggling 5.5 million words. By way of comparison, War and Peace is only 1,444 pages and the Bible checks in at 1,291 pages."

U.S. Representative Jim DeMint (R-SC) [Far too long]

"The federal tax code with its 44,000 pages, 5.5 million words, and 721 different forms is a patchwork maze of complexity and a testament to confusion over common sense."

U.S. Representative Walter Jones (R-NC) [Far too long]

"The IRS tax code is 44,000 pages and growing"

U.S. Representative Bobby Jindal (R-LA) [Far too long]

"The current tax code is almost 60,000 pages, longer than the Bible"

U.S. Representative Dave Hobson (R-OH) [Far too long]

"the current tax code, which at 1.3 million pages is twice the length of Tolstoy's War and Peace"

U.S. Representative Nick Smith (R-MI) [Far too long]

"the federal tax code has about four times as many words as the bible. Accompanying the law are a staggering two-and-a-half million pages of regulations"

Why Should We Care?

The other problem with this rhetoric is that "the average taxpayer" doesn't need "to know, understand and accurately apply" more than a small portion of its provisions. Indeed, delving into this feature of the tax code is key to understanding American politics.

For example, if you are a human being who is a U.S. citizen who earns a wage or salary rather than being self-employed, who doesn't have capital gains, who has entirely U.S. source income and you and your spouse, if any, have a net worth comfortably under $2,000,000, and pay your taxes on time (or by the extended deadline), you don't need to know anything about sections 11-12, 38-52, 171-198, 241-1337, 1341-5891, 6017-6060, 6062-6063, 6163-6365, and 6415-9833.

Put another way, all the typical taxpayer described above needs to know about are sections 1-5 and 15 (tax rates), 21-36 and 53-59 (tax credits), 61-170 and 211-223 (gross income and itemized deductions), 1341 (claim of right rule), 6001-6015 and 6061 and 6064-6161 (tax returns and paying tax), and 6041-6414 (overpayments and refunds). In practice, just about everything a taxpayer needs to know about these tax code sections is digested in the old familiar 1040, which is considerably shorter than the Bible (indeed shorter than many books of the Bible) and written at a more manageable reading level, and significant chunks of the 1040 are inapplicable to the average taxpayer I have described above as well.

To press the Bible analogy a step further, the average Christian does not need, and couldn't use if he wanted to, the collection of original language documents, minutes of translation committee meetings, alternative translations considered and compared to, concordances, and theology treatises that went into writing the Bible on their shelf at home, nor do they need all the extra-canonical materials which were considered at some point of another for inclusion in the Catholic Bible (or its abbreviated Protestant version), but ultimately rejected for some reason or another (some of which are actually referred to in the part of the Bible that was chosen to be canonical).

There were 130.4 million tax returns filed by individuals in 2003. About 50 million were filed on quite simple forms 1040EZ or 1040A. About 19.3 million had business income or losses. An overlapping 36 million has income from other business sources or capital gains or losses. The average American taxpayer files on the full fledged form 1040, but does so only to claim itemized deductions and perhaps to pay alternative minimum taxes.

Indeed, the IRS is currently organized into four divisions that reflect the different degrees of complexity faced by taxpayers, one handles relatively simple wage and investment income returns, one handles small and medium sized businesses, one handles big businesses and a fourth handles non-profits and other entities (like governments) that don't pay taxes in their own right except as penalties. The majority of tax returns are handled by the first division, which has far fewer employees per return than any other part of the IRS because most of these returns are simple to process.

This isn't to say that the average taxpayer's life couldn't be made easier. For example, the dividing line between forms 1040EZ, 1040A and the full fledged 1040 is inartfully drawn in a manner that prevents a great many taxpayers with relatively simple tax situations to file on the full fledged 1040, or to file on a form 1040A when a slight tweak in the forms could allow many more people to file 1040EZ without greatly complicating that form. Similarly, some judicious changes in the rules that apply to ordinary wage and investment income taxpayers could greatly reduce the underlying complexity in the law that drives the complexity that appears in these tax forms. But, the truth of the matter is that the brunt of tax complexity does not fall upon the average taxpayer.

Indeed, it also doesn't unduly burden big businesses who can easily afford to have tax professionals on retainer to handle compliance with tax laws. An insurance company or real estate investment trust or mutual fund may have mountains of complex specialized tax rules to pour through, but it isn't a great burden upon them to do so compared to the scale of the enterprised involved.

Who Is Burdened By Tax Complexity?

The brunt of tax complexity falls on the small business owner with employees, particularly if that small business is in some area where there are sales or excise taxes to be collected, in addition to employee withholding taxes, information returns, business entity taxes, and complex personal tax returns. Compliance costs are a far larger share of profits for people in these circumstances, and unlike your typical individual, far more of the tax code pertains to them.

For example, an owner of a neighborhood convenience store typically has to pay retail sales taxes, alcohol taxes, tobacco taxes, gasoline taxes, employee withholding taxes for income tax and FICA and state income tax purposes, unemployment taxes, local per head employment taxes, business licensing fees, real property taxes, personal property taxes, file an entity level tax return, and file information returns to a variety of suppliers, in addition to their own tax returns. Their entity returns must be supported by complex inventory, depreciation and amortization schedules.

Small businesses also face non-tax complexities with being in business like immigration law compliance, business financing transactions, obtaining and filing claims for insurance, securing zoning and building and business license permits, structuring employee benefits, locating suppliers and wooing customers. Moreover, in disputes, as business people, they are almost never given the benefit of the doubt that courts frequently extend, with or without authorization to do so, to ordinary consumers. I've had more than one client who was a generally together, good worker who tried to go into business get burned not because they were bad at the underlying business they undertook, but because they couldn't pull together are the bureaucratic issues associated with being in business itself.

The amount of effort that goes into collecting taxes is also one of the reasons that small businesses are, year after year, the single biggest source of tax fraud. An employee drawing a salary that puts him in the 25% tax bracket while still paying the full amount of social security taxes may be bearing a greater tax burden on a percentage basis than your typical small business person, but lacks the opportunity to do so, and doesn't face the frustration of having to spend a lot of time complying with the tax laws that a small person person does. This doesn't mean that big business doesn't play tax games either, but in big business, the focus is on legal ways to shelter income and on questionable legal interpretations of the tax code, rather than the out and out fraud (often from undetectable cash payments) that is more common in small businesses, than in any other sector of the tax paying public.

What Does This Mean Politically?

The extent to which a small business owner's tax collection responsibilities take up time and money from someone who didn't set out to be an accountant or lawyer, is one of the driving forces behind the general anti-government, anti-tax, anti-regulation militancy from small business owners that forms one of the major components of the Republican Party coalition (with the Christian Right being the other biggest component of that coalition).

Many small business owners would be far happier living in a world where they had a simpler tax system, even if it meant actually bearing a somewhat greater tax burden, even though looking at tax issues on a case by case basis, they inevitably will opt for lower taxes with greater complexity. This is the political force behind ideas like the flat tax, even though those proposals often don't really deliver the relief that small business owners real need, because most business tax complexity comes from determining a business's income (the one box that all flat tax proposals keep) and not from rates or the number of boxes that must be completed on a tax form.

Unlike Republicans, Democrats believe that government does worthwhile things and that "starving the beast" indiscriminately to get a low cost, low service government, and eliminating substantive regulatory standards that protect people from business excesses like pollution, improper treatment of employees and deceptive trade practices, is unacceptable. But, this doesn't mean that Democrats can be sympathetic to the bureaucratic burdens that small businesses struggle under every day.

What Can Be Done?

While taxing businesses in inherently more complex than taxing wage earners, it can be drastically simplified in revenue neutral ways that can improve voluntary compliance as well.

For example, some new regulations to simplify the process of determining whether someone is an independent contractor or an employee could be even more useful to small businesses that the "check the box" rules that dramatically simplified the tax rules for limited liability companies. And, reclassifying tip income from wages to self-employment income for tax purposes, could free employers from liability for withholding taxes on income that they themselves often find impossible to accurately determine because their employees are not honest with them about the tips they receive.

Similarly, while regulatory standards are necessary, their implimentation doesn't have to be bureaucratically cumbersome for the average employer.

For example, very few employers outside a relatively small class high risk fields have any idea what OSHA requires of them. But, most are, in theory, on notice that they have to comply with a substantial opus of regulations governing employee safety. Creating a short manageable regulation with no independent paperwork requirements in most cases (e.g. "A workplace must not violate building codes, from which it is not exempt as a non-conforming use, in a manner that could reasonably foreseeably harm an employee.", or "All employees who drive vehicles in the course of their employment must have valid driver's licenses and be insurable by an automobile insurance company at ordinary rates, or if they are not insurable at prime rates, otherwise clearly prove that they have overcome the factors that led to their bad driving record.") that covers the main sources of employee injury and death in low risk industries. This streamlined baseline regulation, along with a safe harbor provision that permits employers in low risk industries to ignore everything else OSHA does, and a shift from an inspector driven regime to a private civil action driven regime (in which state attorney generals might be given standing to act, as well as private parties) in low risk industries could dramatically increase the number of businesses in full fledge compliance with OSHA, without changing the effort necessary to comply very much (except where it is clearly justified by injuries or deaths under the current regime). This would permit OSHA to focus its limited inspection resources on industries where there is a genuine risk of harm, in good faith, and shut down political opposition from low risk industries afraid of a politically driven or disgruntled employee driven inspection that finds them not in compliance with regulations that they had never heard of before the inspection.

Similarly, the federal government, in cooperation with the states, could create a single multi-purpose, new employee form that would satisfy all reporting requirements for new employees with all applicable federal agencies, and with all (or at least almost all) state and local agencies, with a single e-filing with an information clearing house which would in turn forward only the pertinent information to the relevant entities. Since all the forms in connection with a new employee have to be filed anyway right now, this would necessarily reduce the paperwork burden on the employer. An e-filing with this agency could also be accessable by the employer in the clearing house's records, so that the employer would not be required to maintain separate in house records itself.

These are only examples, but the bottom line is that Democrats can be business friendly and address legitimate gripes of the small business community without compromising on important substantive policies. Individually, most of these seem like baby steps, and they are, but this is because the nature of the overregulation problem is not that there are large numbers of regulatory regimes out there that serve no purpose. Over regulation is a death of a thousand cuts. Countless examples of insensitive drafting by lawmakers and state and federal bureaucrats have allowed genuinely important regulatory regimes to leech into areas beyond the core problem they were designed to address, and to impose paperwork burdens where a non-paperwork driven regulatory regime might have worked equally well. Often, it is a matter of rethinking the scope of key definitions, and of redesigning or eliminating unnecessary forms, for the most part, which is detail work. But, taken together, these little efforts could have a cumulatively powerful effect on your every day small businesses, and restore their faith that government can work in a manner that produces more benefits than costs for the private sector.


Sotosoroto said...

How about revising it to one sentence: "Every state must pay the federal government $5,000 per resident." Simple and it gets the job done. States can modify their own taxes accordingly. And you can throw in a sentence about inflation if you really want to.

Andrew Oh-Willeke said...

Bad idea.

This was essentially the law under the Articles of Confederation in effect prior to our current constitution, which was effective in 1789, well after the Revolutionary War was completed. It was also, in more or less exactly that language, the original domestic taxing mechanism provided by the 1789 constitution (Article I, Section 9, Clause 4). To my knowledge, no tax was ever imposed in that form, however, although it would clearly be constitutional if it was imposed.

Why? It doesn't work. The problem is that there was no effective remedy.

What do you do if Ohio doesn't find a legislative majority to comply with the law and cough up to pay for the Defense Budget or the interest on the national debt? Send in the Marines to take over Columbus? Send U.S. marshalls door to door asking for $5,000 checks? Sell the capitol building in Columbus to the highest bidder at a foreclosure sale?

This is not an academic matter. The Ohio Supreme Court has done precisely this at the state level in the face of legislative non-compliance with a court order to fund the public schools as required by the Ohio Constitution and repeatedly been blown off in the process.

Historically, the federal government survived principally upon customs duties and excise taxes until the Civil War. In the early American period the Congress managed to live within this narrow means.

But, when the Civil War came an income tax was imposed, because no other method to raise the funds could be devised. It was repealed after the Civil War and went through a few more iterations and court challenges until the 16th Amendment authorizing the income tax was passed.

Also, trying to delegate federal taxation to state governments would be a disaster for interstate businesses.

Screaming Freedom said...

Who cares about a tax cut?

I want to see Government stop spending like we have money to spare.
I wouldn't mind if government was cut by a third and most of that would probably be waste.

Sotosoroto said...

Andrew, it sounds like you're saying that the federal government won't get money from the states because the states won't pay attention to them. But the current system works because the feds are big enough to frighten individual citizens into paying. What happens if you don't pay taxes and try to live free? You eventually get shot and killed by the government (while escaping from prison). So if that's the sword hanging over our heads as we send in our checks, why couldn't the same sword be held to the throats of the states?

Andrew Oh-Willeke said...

Usually what happens before some idiot gets himself shot, is that the federal government puts liens on his real estate, seizes his personal property and garnishes his wages. None of these remedies work very well against states.

Garnishing tax revenues doesn't work well, because the whole problem is that there isn't enough revenue being collected because the legislature didn't impose it.

Foreclosing on real estate doesn't work well because most state real estate is stuff that has no good non-governmental purpose or is a financial burden (e.g. roads, bridges, dams, parks established in undevelopable locations, capitol buildings, etc.).

Seizing personal property doesn't work well, because it often gums up the process of collecting taxes. Seize the department of revenue's computers and you aren't any better off.

And, arresting people for violating court orders is problematic, because there is rarely one person who can be held responsible. The entire legislature plus the Governor failed to cooperate, and none of them have the power to impose taxes unilaterally.

Andrew Oh-Willeke said...

Screaming Freedom, look at this chart and tell me where there is room to slash the federal budget by a third (and this chart includes only discretionary programs, if you want to cut entitlements instead, you can explain how you want to cut them.)