Tax reform - an exercise in complexity - Column - Brief Article

USA Today (Society for the Advancement of Education), Nov, 1997 by Jeff A. Schnepper

Given the opportunity to drive a stake through the heart of the deficit, Congress and the President chose instead to throw a party, On Aug. 5, 1997, Pres. Clinton signed into law a tax package with $94,000,000,000 in tax cuts. The first Federal tax reduction in 16 years, this bundle of goodies provides relief to the middle class and the rich, celebrates the value of the family, and encourages both children and their going to college.

The act marks the 31st out of the last 34 years in which there have been tax law changes. It proves the adage that the only difference between death and taxes is that death doesn't become more complicated every time Congress meets. In 1986, Americans were presented with what Congress called "tax simplification." Rates were to be flattened and reduced and computations simplified; it turned out that they weren't. Congress has spent the last decade reversing that process.

House Majority Leader Richard K. Armey (R.-Tex.) and Bill Archer (R.-Tex.), chairman of the House Ways and Means Committee, joined in the following 1997 critique of the Federal tax code: "Our tax system is complicated and unfair, and it must be eliminated." So, they poisoned the roots with more complexity.

The new law makes more then 800 changes to the massive Internal Revenue Code. Some become effective immediately; nearly 70 won't take effect until January, 1998; and a few others won't kick in until after 1998. There are changes that are phased in through 2007. Capital gains are now taxed at rates of eight, 10, 18, 20, 25, 28, or as much as 39.6%, depending on what year you are in, what you are selling, and how long you held the property. There used to be one simple IRA. Now there is the regular IRA, the Roth IRA-plus, and the education IRA. Each is taxed differently and each has different income limitations to qualify.

Talk about social engineering. The government's message to the American people is that Big Brother knows best. Do what he wants you to do, how he wants you to do it, and when he wants you to do it, and we will give you a tax break. The new law will benefit members of Generation X, but only if they have the discipline to make annual IRA deposits. Have kids, go to college, and invest--but only long term--and we will reward you. Kids, college, and long-term investing are not bad. I personally am very much in favor of all three. However, the Federal income tax code should not be the vehicle to encourage them.

Cutting taxes for social engineering is nothing more than a backdoor approach to tax spending. Rather than facing the hard choices of direct grants for specific constituencies, Congress and the President have hidden these expenditures by structuring them as tax deductions or credits. It merely is pork passed out as tax benefits. The new tax law is a Christmas tree with presents for everyone. It is a pension reform law, a child welfare law, and an education spending law.

More than anything else, it is a full employment and get rich quick law for tax planners and the tax preparation industry. You might save substantial tax dollars as a result of the changes, but there is an entry fee to enjoy these benefits. If you don't understand the myriad provisions in the act, a computer tax preparation program like TurboTax might help--if you are prompted with the right questions and the solution is a mere mathematical computation. What if you need interpretation, though? What's going to be the impact on your state taxes? Changes such as the child credit and the reduction in capital gains rates do not flow through automatically to most of the states that levy an income tax. I am a tax expert with two law degrees and an MBA in finance and am licensed by the New Jersey Board of Certified Public Accountants. I have spent two decades teaching taxation, both on the undergraduate and the graduate levels, have published 20 books and almost 400 articles on taxation, and even I am overwhelmed! Every CPA I know is buried in complexity-and these are the people who will be doing your tax return. Every tax package should come with the following warning: "Do not even think about attempting to try to do this yourself!"

It's not like the tax code was simple before the new law was passed. Several years ago, consumer advocate Ralph Nader's Tax Reform Research Group prepared 22 identical tax returns based on the fictional economic data of a married couple with one child, and these 22 identical copies were submitted to 22 different IRS offices around the country. Each office came up with an entirely different figure. The results varied from a refund of $811.96 recommended in Flushing, N.Y., to a tax due figure of $52.14 derived by the tax office in Portland, Ore. The discrepancies were not just the result of IRS incompetency. Each tax season, Money magazine gives identical tax data to 50 top tax preparers around the country, and inevitably it receives back 50 different answers.

The Tax Relief Act of 1997 is a sacrifice of simplicity on the altar of greed. There will be a backlash--not now, when everyone is uplifted by his or her own benefit, but later, when the emotional and financial costs of the new law really are felt. The new law is a Trojan horse, a prelude to a complete overhaul of the tax system. Steve Forbes ran for president in 1996 on a flat tax platform. I predict the flat tax will be a major issue in the 2000 election.