How Did the Tax Code Get so Complicated?
Investor's Business Daily
March 28, 2005
By Ernest S. Christian
One thing is certain about taxes: The multivolume
federal income tax code of today did not grow from a tiny
eight pages in 1913 solely in order to be big enough for the
task of collecting more taxes from more people more often.
Only a small portion of the tax code is directly involved
in raising the amount of tax revenues needed to pay the public
costs of a civilized society. The largest and most complex
parts serve the ideological and political purposes of members
of Congress. As one of its staff reports says: "Congress
decided to use the tax system to encourage certain . . . behavior."
In the early days of the income tax, Congress was first
concerned with establishing its new power to tax income and
then with deciding whose income it was going to tax. Predictably,
it decided to tax only the income of the wealthy (in 1913
only 85,000 people and less than 1% of voters). With that
quickly settled, for the next several decades federal tax
policy was primarily concerned with how much higher Congress
could push the tax rates on rich people and corporations without
destroying the emerging industrial economy.
In 1924, the Democratic Party's platform summed it up by
declaring that the "income tax was intended to be a tax
But World War II democratized the income tax. Nearly everyone
became a taxpayer. High tax rates were no longer reserved
for rich people. And the income tax was on its way to becoming
the middle class burden that spawned Phyllis McGinley's little
I'm a middle-bracket person
With a middle-bracket spouse
And we live together gaily
In a middle-bracket house.
We've a fair to middlin' family.
We take the middle view.
So we're manna sent from heaven
To Internal Revenue.
As soon as the income tax became nearly universal among
voters, the real power in Congress' "power to tax"
became the ability to discriminate among them.
And all successive Congresses have assiduously gerrymandered
the tax code for the purpose of collecting the maximum amount
of tax from the smallest number of voters.
First, they adopted highly progressive rate schedules designed
to increase the tax burden on people who comprise less than
half the voters.
To further skew the tax burden away from a voting majority,
Congress enacted special tax reducing deductions or credits
and specified the characteristics of those allowed to use
them. Finally, in more recent years, the Congress has used
various "black box" tests to identify a minority
of voters who are required to pay extra heavy taxes under
special sets of rules that apply only to them.
As a result, the tax code is now eight times bigger than
in 1954 and immeasurably more complex.
Because of Congress' dedication to systematic inequality
among taxpayers, filling out a tax return is for some like
running an obstacle course where the slightest misstep leads
to disaster. For others, it is an exciting treasure hunt that
leads to rewards. Many people even get "refunds"
of taxes they never paid.
Worse, the rules keep changing and, frequently, so do the
winners and losers. In the past 20 years, Congress has amended
the tax code more than 10,000 times, and the turmoil never
stops. Since 1993, before the ink dries on one set of tax
rules, the Congress has every 18 months enacted several hundred
new ones. No wonder Alan Greenspan recently said "stability"
should be a main goal of tax reform.
The tax code's most Orwellian complexity traces back to the
Tax Reform Act of 1986.
At that point, Congress dropped all pretense of evenhandedness
and expanded an entirely separate income tax - called the
alternative minimum tax (AMT) - that applies solely to people
identified as not paying "enough" tax.
The victims are required to fill out two tax returns, one
under the regular tax and one under the alternative tax.
And if they fail a complex mathematical inquisition, they
are required to pay a penalty amount of extra tax.
Bias In The Code
As matters have turned out, a large number of middle-class
voters are hit hard by the little monster called AMT.
Therefore, Congress is busy further complicating the tax
code in an attempt to redirect the AMT back toward its original
In the spirit of '86, the Congress also customized the tax
code with complex phase-out rules (originally called PEP and
PEAS) that target taxpayers who have rising incomes. As their
incomes increase above specified benchmark levels, a formula
"phases out" their access to certain IRAs, the child
credit and even such basics as personal exemptions and traditional,
This exercise in rank discrimination also backfired, hitting
large numbers of middle-income voters with backdoor tax increases.
As a result, the Congress is now phasing out phase-outs
- but only selectively and only one step at a time, thereby
temporarily making the tax code even more complex.
Since 1981, the Congress has "churned" the tax
code with 18 major tax enactments - half of them net tax cuts
and half net tax increases. But few of these enactments were
straightforward, across-the-board tax increases or decreases.
Instead, nearly all contained a mixture of increases for
some taxpayers and decreases for others.
For example, when measured over 10 years, the 1997 act cut
taxes by $296 billion, but it also contained $108 billion
of tax increases for certain disfavored taxpayers.
Can't Understand It
A classic case is the American Jobs Creation Act of 2004,
which contained an evenly balanced $136 billion of tax cuts
for some and $136 billion of tax increases for others. To
make it worse, the "mix" of tax increases and decreases
for particular groups of taxpayers often shifts from one year
to the next, resulting in a constantly changing kaleidoscope
of tax increases for some and tax decreases for others.
Every time Congress increases or decreases taxes, many hundreds
of additional miscellaneous changes in the tax code are made
in order to gain the number of votes needed to get the legislation
out of committee or for final passage in the House and Senate.
There was a time in the not too distant past when one of
these tailor-made amendments to the tax code was an easy way
of rewarding a loyal constituent - but tinkering with the
tax code is no longer a job for shade tree mechanics. Today
most of the "riders" that successfully attach themselves
to each major tax act have been in the works for several years,
make intricate changes in the tax code, and are understood
by only the handful of taxpayers who are affected by them.
The tax code is too complicated for taxpayers or the IRS
to understand and apply.
It is also complicated beyond the point of being able to
serve the political and ideological interests of Congress.
Even the members of the tax-writing committees find it difficult
to hang more gargoyles onto this overcrowded structure.
Perhaps it is time for these and other architects of the tax
code to take another approach. The nation would be well served
if they redirected their creative talents toward replacing
the present baroque tax code with a minimalist version that
is built around the principles of equality and economic good
Christian is a former Treasury tax official who is director
of the Center For Strategic Tax Reform in Washington, D.C.
He can be reached at firstname.lastname@example.org. The first four parts
of this series appeared on Feb. 1, Feb. 15, March 1 and March