Why the tax system keeps getting more complex

Martin Wolk Chief economics correspondent • Profile • E-mail

Almost everyone agrees that our federal income tax system is far too complex, but as Tax Day approaches, the problem is only getting worse.

Over the past 20 years, the tax code has gotten steadily more complicated as Congress has made a staggering 15,000 changes -- an average of more than two a day. The enormous tax-cut packages of 2001 and 2003 only added to the confusion, introducing a wealth of new special tax breaks along with a variety of sunset and phase-out clauses that make long-term planning a challenge. In the past six years alone the IRS has had to add nearly 100 new tax forms, and the total number of pages required to define and explain the code has soared 42 percent to more than 66,000, according to the Cato Institute.

No wonder the days when most people prepared their own tax returns are long gone, and now more than 60 percent of us hire a professional to handle the details. What with the widening net of the alternative minimum tax, tax breaks for everything from education to hybrid cars, and deductions for mortgage interest, retirement contributions and state sales tax, wading into the Form 1040 is a daunting prospect.

"Our tax code is rewritten so often it should be drafted in pencil," members of President Bush's Tax Reform Panel said in submitting their report late last year. Yet that report was virtually dead on arrival at the White House, as an administration left with a scarce supply of political capital declined to take on the panel's recommendations in an election year.

"Must be in a closet somewhere, on a shelf somewhere," grumbled panel Vice Chairman John Breaux, a former Democratic senator, after President Bush omitted any mention of it in his State of the Union address. Bush economic adviser Allan Hubbard later confirmed that tax reform is off the table for this year, blaming a lack of support on Capitol Hill.

The idea of simplifying the nation's tax system has broad public support, with 80 percent favoring major changes or a complete overhaul in one recent poll, and 52 percent saying they would give up some deductions to simplify federal taxes.

By itself, the complexity of the nation's tax system imposes high costs on businesses and individuals. Just complying with the system through record-keeping, education and compliance costs the nation $265 billion, or 2 percent of the gross domestic product, said Chris Edwards, director for fiscal policy studies at the Cato Institute.

"I think a bigger cost is in the way complexity interferes with economic planning," he said. On the business side, tax complexity has created an entire industry devoted to aggressive tax avoidance. National Taxpayer Advocate Nina Olson, an internal IRS watchdog, talks of an "endless cycle" in which the complexity of the tax code creates loopholes that are exploited, leading to yet more regulations.

For individuals, the federal tax code offers a confusing array of hard choices for planning how to finance long-term objectives like retirement and college education.

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