Tax Day Tally

April 15th has come and gone and the issue of paying taxes may be losing its urgency for many. But in Washington, taxes remain an important topic of conversation, with President Bush and the Congress still hammering out the budget for next year. The president is pushing for a significant tax cut, but Congress has balked, with the Senate proposing to reduce the $726 billion tax cut proposal to $350 billion. Beyond the size of the government’s take, the complexity of the tax code also has sparked discussions on the future of tax policy in America. The tax code has grown so complex and so riddled with special interest loopholes that a real debate over fundamental tax reform is beginning to emerge.

Although April 15th marks the day people pay their taxes, Tax Freedom Day, which is April 19th this year, marks the end of the taxpayers’ servitude to the government. That is, everything the average taxpayer earns through April 19th goes to paying taxes. Calculated by the Tax Foundation, Tax Freedom Day includes federal, state, and local taxes (the breakdown by state is available on their website, www.taxfoundation.org).

Tax Freedom Day provides taxpayers an important reminder of the burden of federal taxes. As noted in the Tax Foundation report www.taxfoundation.org , taxpayers spend more time working to pay taxes than to cover the costs of food and shelter. In 2003 the Congressional Budget Office http://www.cbo.gov/showdoc.cfm?index=4129&sequence=0 forecasts collections to total $1.85 trillion, or 17.3 percent of gross domestic product. Unfortunately, government spending is predicted to be even higher, totaling $2.14 trillion, or 19.9 percent of gross domestic product, which leaves a deficit of 287 billion dollars (and this does not include supplemental spending for the war). Over the years, Congress has demonstrated a high propensity to spend, and tax cuts pose a threat to many favored, but unnecessary spending items. The debate in Washington is important to all taxpayers; it is a debate over who should spend the taxpayers’ money: the people who earned it, or the federal government.

Tax cuts are an important and necessary step toward reducing the size and scope of government, but even if the president’s tax cuts are enacted, taxpayers will continue to face a substantial burden complying with the current tax code. The Office of Management and Budget http://www.whitehouse.gov/omb/inforeg/2003_info_coll_dism.pdf estimates that taxpayers spent 6.7 billion hours working their way through the forms and instructions required to pay their taxes. As the agency notes, ”Overall the paperwork burden associated with the Internal Revenue Code dwarfs the paperwork burden on every other part of the Federal government, accounting for approximately 80 percent of all the paperwork burden of the Federal government.” In fact, the code has become so complex that more than half of all individual filers rely on the services of a professional to complete their taxes.

It would be easy to simply blame the Internal Revenue Service for the complex and heavy-handed tax code, but in many ways the I.R.S. is only doing the bidding of Congress. Tax laws are passed in Congress, and those laws are the product of special interest lobbying seeking favors in the tax code and political interests using the tax code to promote certain behavior or policies. As it stands, the tax code is not simple, fair, or efficient. Congress passed these tax laws, and it is up to Congress to reform them.

For years it has been quite clear that the marriage penalty is unfair, yet Congress has yet to eliminate it. The Alternative Minimum Tax, created as a soak the rich tax, is reaching more and more taxpayers who now find themselves calculating their taxes twice—once in the traditional format and then again under the AMT—before filing their taxes. And the tax on dividends, a form of double taxation, is a prime example of how the tax code penalizes good behavior such as saving for the future.

The tax code should be simple and easily understood by taxpayers trying to calculate their tax burden. In addition, it should be efficient, collecting the required revenues in a manner that imposes the least cost on individual taxpayers. The tax code should be fair and not require individuals making the same income to pay widely different taxes. And above all, taxes should be low, allowing taxpayers to keep hard-earned dollars rather than send them to Washington. On all these accounts, the current system is a failure. The president has embarked on an effort to cut taxes, which is a significant step forward. Hopefully, this will be followed by fundamental tax reform, sweeping away decades of inefficiencies in favor of fairer, flatter tax code.