Wednesday, February 19, 2014

ON TAX COMPLEXITY


I was recently asked a tax question regarding the proper reporting of a certain employee benefit paid to a nonprofit entity’s employee.  I gave the correct answer to the nonprofit’s treasurer and thought that was the end of it.  The answer that I had given was not liked by the employee it affected, and this opened a dialog between the treasurer, the employee, another tax preparer, and a fourth party that was the supplier of the particular employee benefit.  Most of the controversy arose because of a difficulty of defining the question to be answered.  The employee, the other tax preparer, and the benefit provider were each answering different questions because the persons asking the questions did not know enough of our complex tax system to even ask the right question.  I believe this helps to demonstrate that our tax system has become much too complex.

Any good tax system should be, at the very least, one that those being taxed can understand.  Recently we had to tell our clients that we could no longer give any kind of an estimate of their taxes owed without inputting their information into our computer.  There are now so many provisions that are phased in at different income levels, and that are subject to special and peculiar limitations, that it is nearly impossible to make an intuitive guess as to potential tax liability.  When a person is unable to visualize even an approximation of their tax consequences of a contemplated action, it is very hard to make everyday economic decisions.  The result of this kind of complicated tax system is a mix of anger and indecision that is bad for our economy.

It is time that we all expressed our concern to our elected representatives.  We are tempted to think that we are powerless to evoke a positive change in our system, but my experience is that our elected representatives do listen to what we say, and that it takes a relatively few contacts to influence their thought.  From a few hundred to a few thousand contacts will often be enough to get an elected official to act.  When even experienced tax professionals are having difficulty with the complexity of our tax system it is past time to get the system changed.

Loren L McCann, CPA, MS (Tax)

3 comments:

  1. Nice suggestion that we contact our reps.

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  2. Amen. I worked for a CPA for many years, and the complicated tax code is what kept the office in business. I think most people are willing to pay a certain amount of tax to keep our government operating, but it's frustrating when one's tax liability isn't simple to calculate. So I agree with your last statement: when tax professionals have a hard time figuring it out, it's time for a change. What do you think about a flat 10% tax rate for all?

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    1. A "flat" tax sounds good and I would be in favor of that kind of approach. However, the tax base upon which the flat rate would be applied is the area where it is difficult to get people to agree. Congress came close to this in 1986 with the two rate system and much reduced deductions. But Congress did not even last a year before they were adding complications to the system again and it has been a steady process up to today. I am all in favor of trying again, but I have little faith in Congress leaving it alone once it is in place.

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