Monday, July 23, 2012

The Complexity of the Tax System

Today's Wall Street Journal has an article on firms passing up some tax breaks because of the complexity and the hassles.  Since many of the breaks are for small firms, the cost of compliance tends to be more relative to benefits.  The Small Business Administration estimates that the tax-compliance cost per employee for a firm with fewer than 20 employees is about $1600 compared to less than $800 for firms with 20-499 employees.  The article notes that many in Washington decry the complexity of the system, yet the system persists. Why?  The author of the article offers an answer, "...both theWhite House and Congress can't seem to resist fine-tuning the tax code to satisfy their diverse goals."  Precisely.

The complexity is there for the code we pay as individuals also.  Most people don't itemize deductions even though anyone paying a mortgage is likely to have lower taxes by itemizing.  Again, is it the complexity and not wanting the hassle that leads to this behavior? 

During the early years of the Reagan presidency, when the Republicans had captured the Senate for the first time in decades, there was talk of tax reform and simplification.  If I remember correctly, Bob Dole was the head of the appropriate committee in the Senate and he said that he didn't believe in simplification  for the sake of simplification.  I do.

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