What ever happened to the idea of simplifying the tax system? It was all the rage last year when Malcolm "Steve" Forbes, Jr. was trumpeting his "flat tax" proposal. One would think that with tax issues now front and center in Congress, tax simplification would be at the top of the agenda.
But the two major tax bills wending their way through Congress are designed to make the tax system more complex, not less so. Here are just a few of the eye-glazing details from the House of Representatives version of the bill: a phase out of the Dependent Care Credit (on top of the current phase-down system), new tax-exempt investment accounts that have to be kept separate from other accounts because of a variety of detailed rules about putting money into and taking money out of them, a Child Credit with special provisions to deny it to low-income families and phase it out for upper-middle income families, a new education credit for half of tuition payments with a maximum dollar amount and an income phase-out, and for capital gains income there are two new special rates, indexing for inflation and a "mark-to-market" provision.
If you think just reading that was bad, wait and see how you feel next April if this 419 page bill becomes law. Even if some of these provisions don't apply to most people, each year we're all going to have to figure out whether they apply to us or not. Moreover, these are just a few of the complications added to the tax code in House Ways and Means Chairman Bill Archer's legislation. Senate Finance Chairman William Roth's bill is almost as bad.
If either of these bills becomes law, the tax lawyers and accountants will be working overtime to exploit all the new potential tax sheltering opportunities that the bills create. And that, in turn, will lead to even more complexity as the IRS adds reporting requirements to limit abuse.
So why are they doing this? After all, just this past April 15th Archer complained, in a joint statement with House Majority Leader Dick Armey, that "[o]ur current tax system is complicated and unfair." Archer is an advocate of a national sales tax, arguing that it would be simpler than the current system. Armey has a flat tax plan. Sen. Roth has said that "[n]othing infuriates people back home more than this complex tax situation, which no one understands or feels is a good deal."
The underlying reason why these supposed champions of tax simplification are supporting tax complication can be found in an old tax policy adage favored by Washington's special-interest lobbyists: "No tax bill is too complicated if it lowers our clients' taxes and no tax bill is simple enough if it raises them." Archer's national sales tax and Armey's flat tax are both extremely skewed to benefit the wealthy. Likewise, both of the tax bills now pending in Congress are loaded down with gimmicks and tricks to cut taxes for the best-off of Americans. That's the real agenda here--cutting taxes for the wealthy.
Some of the provisions in the tax bills that benefit the well-off are obvious. Archer's plan to index capital gains for inflation clearly benefits the wealthy the most, since almost two-thirds of capital gains income--profits from the sale of appreciated stocks, bonds and other capital assets--goes to the richest 1% of the population. No matter that the New York Bar Association has called indexing capital gains "fundamentally flawed" and predicts that it would "overwhelm taxpayers and the IRS."
Other gimmicks more subtly benefit the best-off. For instance, phasing-out of some tax credits at higher incomes would seem to actually hurt the wealthy. But reducing the child credit, for example, for single parents with income over $75,000 and for couples earning more than $110,000, leaves more money for tax cuts for the truly rich.
It is appallingly hypocritical for the Bill Archers, Dick Armeys and William Roths of the world, who rail against the complexity of the current tax system, to author legislation that makes the system much more complex. But simplification isn't really their objective. Their true objective is to cut taxes for the wealthy. In that, they are being perfectly consistent.
Michael Ettlinger is Tax Policy Director for Citizens for Tax Justice. Citizens for Tax Justice is a Washington, D.C. based research and advocacy organization working for a fairer federal, state and local taxation.
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