Tax Time

In honor of tax day (which is not officially for two more days), I thought I'd make a brief comment on the complexity of the U.S. tax system. Since I've earned enough money to receive a W-2, I've always done my own taxes. At first I used the IRS's 1040-EZ form, but I've since graduated to the standard 1040 form and I do my taxes online. I'm still amazed how many people, even folks with financial situations no more complex than my own, that spend a non-negligible amount of money to have someone else prepare their taxes.

(from kenteegardin on Flickr)

This is what makes the idea of tax reform is so compelling, in theory anyway. Instead of having to go through pages and pages of questions asking really detailed and personal questions about your life situation, or paying someone your hard earned money to do the paperwork, why can't there just be a single form where you type in my income, withholdings, and be done with it?

Alan D. Viard says tax reform won't happen because it's not a top priority for the voting public. Instead, they're more interested in tax cuts, even within the complex framework. I think that's mostly correct.

From another perspective, tax reform would mean giving up some control over certain aspects of the economy. Like it or not, taxes can be used to drive consumer behavior.

The mortgage interest deduction is a classic example of a tax incentive designed for a very specific purpose: get people to buy homes. Society thinks homeownership is good, so government strives to get more people to buy homes. There are a lot of people who have a strong interest in maintaining the mortgage deduction: homeowners, home builders, contractors, Realtors, etc. So even if tax reform generally isn't a top priority for anyone, it can be easily spun as a tax hike for anyone receiving this deduction.

And this is just one of many examples. I benefited greatly this tax year by the student loan interest deduction. It required keeping track of more documents, and spending more time filling out the 1040, but it was worth it.

So sure, everyone is for tax reform, until you put a price tag on it. Calling tax reform a tax hike is all it will really take to kill it politically.