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Tax Problems? Ask The Accountant: Congress Has Created An Industry That Simply Has to Go



Dan Dunn

For most of you, this column is late. You have already filed your taxes; you won't spend the next two days in paper-driven panic. Undergraduates mostly just sent their W-2 from the summer and from MIT to mom and dad, who filled out the 1040-EZ and sent it in. The graduate students fill it out themselves, but still, it's only a 1040-EZ.

But just wait until you begin to make some serious money. Or, God forbid, you begin to invest. Hell hath no fury like the government looking for money. You will find the mysteries of the Form 1099, the Schedule D, and Form 4868. You have all had problems sets: I'm not claiming taxes are harder, but you will notice more than a passing resemblance.

This year the tax system is more complex than ever. There are three basic levels of capital gains, plus two more, depending on how far back your purchases are grandfathered. There are multiple tax brackets for different incomes. This doesn't even begin to cover such confusion-creators as the alternative minimum tax, mortgage deductions, child credits, education credits, and dependent status.

Why does the government do this to us? Or, in a different phrasing, why do we subject ourselves to this? Unfortunately, the government needs money. We the voters have decided that the government should provide certain benefits, and every April 15, we get the bill $782 billion in individual tax returns, to be exact.

The income tax is here to stay. People whine and complain, but no one has a better idea, at least not one that we can reach consensus on. But does the income tax have to be this onerous? Does it have to be this complex? It absolutely does not.

At the very least, it should not be getting worse. But the new tax code that was passed last summer has widely been hailed as the most complex ever. According to the Internal Revenue Service, more than 80 percent of all Form 1040s are filed by a paid preparer; no one knows how to do his or her own taxes.

Our tax system is inefficient. I think my best argument for this is the tax assistance industry itself. This isn't a sector that adds value to anything. Tax preparation is a completely fictional product, created by and for the government. Is our country stronger because these people are printing reams of paper? Do people enjoy their lives more because each year they sign a neatly prepared tax form?

The answer, of course, is no. But this leach on society is making money hand over fist. When Congress writes new, more complex tax laws, tax preparers smile. In the nine month period ending January 1, essentially the period of the new tax laws, H&R Block's revenue jumped 53 percent.

The common wisdom agrees that tax preparers are making money this year. Brian Wesbury is an economist for Griffin, Kubik, Stephens & Thompson in Chicago. He created a "tax index" composed of H&R Block, Jackson-Hewitt, and Gilman & Ciocia, the three largest tax preparers. In the six months since the new tax bill passed, their stocks have gone up 650 percent.

These profits and stock runs would be fine if they had a product that actually did something. A software company, a manufacturer, or even a movie studio would be fine; they contribute, in their own way, to the advancement of American society. But tax preparers? They should not be the growth sector of the stock market.

So what is the answer to this problem? The tax code needs to be simplified. I don't have a strong opinion on how that should be done. I can see arguments for a big reform, or my favorite, a flat tax. But I strongly believe that the current system has to go.

When I mention the flat tax, I instantly hear a slew of liberal voices screaming about regressive taxes, but that is a knee-jerk reaction. It is possible to write a very simple tax that is not truly flat. Eliminate the deductions, credits, and subsidies. Make two, or maybe three tax brackets. Then you will be able to do your own taxes - and in a minimum of time at that.

You have filed your taxes already. After the flurry of news stories passes tomorrow, you will forget about them for another year. But mark this date on your calendar: May 9. According to the Tax Foundation, that is the average American's Tax Freedom Day; on that day, you will have paid off the government for the year. Then, you will begin working for yourself.