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Saturday, May 28, 2011

250 reasons for federal tax complexity

I noticed a report from the Joint Committee on Taxation issued in December 2010 that has a variety of interesting information in it. It is titled - Present Law And Historical Overview Of The Federal Tax System (JCX-51-10; 12/1/10). On page 65, there is a chart showing the number of tax expenditures in the income tax, as counted by the Joint Committee on Taxation (the definition of tax expenditures might be counted differently by others including under different political administrations - for more on that, see "Rethinking the Income Tax Calculation - A Look at Tax Expenditures," AICPA Tax Insider, 2/10/11).

Here is the chart (from page 65 of the report). Notice not only the increase in number of special deductions, exclusions and credits (about 90 in 1980 versus 250 in 2010), but also the tremendous increase just from 2006 to 2010.

This is a lot of special rules that are not crucial to defining the income tax base. These expenditures do not include the standard deduction and personal exemption as they are viewed as part of a basic income tax (to recognize that some income should be untaxed as you need it to live on). Special rules, especially so many of them, cause the following problems:

  • Complexity

  • Inequities

  • Economic inefficiencies (non-neutral system)

  • Lack of transparency as to what one's real tax rate is

  • Higher tax rates

btw - Another interesting item in the report is the listing of how capital gains have been taxed since 1921 when any special treatment for them was added to the Code (pages 57 - 62).

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