Tuesday, April 18, 2006
The Simple (Tax) Life
Tax rates are down, but tax complexity is way up.
"Tax complexity imposes at least four costs on society. First, it creates a large and growing 'tax industry' that draws some of the nation's brightest minds into unproductive activities such as designing corporate tax shelters.
Second, tax complexity impedes efficient decision making. For businesses, complex rules for depreciation, capital gains, and other items interfere with decisions such as capital investment and mergers.
For individuals, tax complexity confuses important life choices such as saving for retirement and making the career jump to self-employment. A recent survey by tax publisher CCH found that two-thirds of taxpayers could not correctly answer basic questions about the tax rules on home sales, retirement savings, and other items.
Third, complexity promotes an invasion of privacy by the government. The IRS needs to hunt for volumes of data to enforce the rules on all of the code's special breaks, such as those for education and housing.
Fourth, complex tax rules exacerbate noncompliance with the law. A recent government report found that the gap between federal taxes owed and taxes paid is about $345 billion annually. The aggressive tax avoidance we saw with Enron and other firms is not surprising given that the corporate tax combines intense complexity with a very high tax rate.
The good news is that reducing tax avoidance, simplifying the tax code, and boosting economic growth go hand in hand."
"Tax complexity imposes at least four costs on society. First, it creates a large and growing 'tax industry' that draws some of the nation's brightest minds into unproductive activities such as designing corporate tax shelters.
Second, tax complexity impedes efficient decision making. For businesses, complex rules for depreciation, capital gains, and other items interfere with decisions such as capital investment and mergers.
For individuals, tax complexity confuses important life choices such as saving for retirement and making the career jump to self-employment. A recent survey by tax publisher CCH found that two-thirds of taxpayers could not correctly answer basic questions about the tax rules on home sales, retirement savings, and other items.
Third, complexity promotes an invasion of privacy by the government. The IRS needs to hunt for volumes of data to enforce the rules on all of the code's special breaks, such as those for education and housing.
Fourth, complex tax rules exacerbate noncompliance with the law. A recent government report found that the gap between federal taxes owed and taxes paid is about $345 billion annually. The aggressive tax avoidance we saw with Enron and other firms is not surprising given that the corporate tax combines intense complexity with a very high tax rate.
The good news is that reducing tax avoidance, simplifying the tax code, and boosting economic growth go hand in hand."
