Tax Analysts®Tax Analysts®

Article Archive

December 10, 2001
Historical Analysis -- The Tenacity of Tax Complexity
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM

Last week, a gathering of the faithful met to discuss tax simplification. It was a high-minded group, its members genuinely concerned -- and sometimes amused -- by the hopeless complexities of the federal tax system. In a nicely ironic twist, the meeting was held in a congressional hearing room -- sort of like a seminar on honesty hosted by your local den of thieves.

Indeed, Congress emerged from the meeting as the principal scapegoat for complexity. And deservedly so, since lawmakers are the ones, after all, who make the law. In fact, though, the session implicitly indicted another, even more culpable purveyor of complexity: We have met the enemy, and he is us.

Persistent Problems

Simplification is one of those topics that keeps tax historians in business. Complaints about tax complexity echo through every era of American history. Observers often point out that the Joint Committee on Taxation has its roots in worries about tax complexity; Congress created the panel in 1926 to help lead the charge for a simpler tax system.

In fact, though, complexity was old hat by 1926. Sixty years earlier, critics had derided the Civil War tax system for its countless confusing provisions. Editorial writers for The New York Times lambasted Congress for creating such a monster. “They have established a system remarkable for its complexity and vexatiousness,” the paper declared. “They have rendered taxation as mischievous and depressing as a perverted ingenuity could make it.”

Another critic decried constant tinkering with the system. “The whole law wants simplicity of arrangement,” said a writer for the American Law Review. “With each session of Congress, there are fresh experiments, and the whole system is remodelled [sic] every year. Uniform administration of the law thus becomes almost impossible.”

Congress repealed the income tax in 1872, but tax complexity didn't go with it. The nation returned to its revenue roots, relying on tariffs and excises. Both were fraught with complexity, and critics continued their litany of complaint. In 1888, the Senate Finance Committee felt moved to modest action, convening several hearings on “Reducing Taxation and Simplifying Laws on Collection of Revenue.”

When the income tax returned to the federal tax system in 1913, more complexity complaints came with it. A cynical Sen. Elihu Root offered scant consolation to an unhappy acquaintance. “I guess you will have to go to jail. If that is the result of not understanding the Income Tax Law I will meet you there. We shall have a merry, merry time for all our friends will be there. It will be an intellectual center, for no one understands the Income Tax Law except persons who have not sufficient intelligence to understand the questions that arise under it.”

In 1919 a panel of tax experts declared simplification a critical priority. The law, they contended, was “in such shape that the ordinary citizen cannot understand it, and upon many of the difficult questions which arise cannot get very good advice from the average lawyer, accountant, or local internal revenue officials.” President Woodrow Wilson agreed: “Simplification of income and profits taxes has become an immediate necessity.”

Soon after, Congress established the Joint Committee, and for the rest of the 20th century, experts struggled against the trend toward complexity. Like England's King Canute, however, they could not hold back the tide.

Complexity and the Political System

One sad fact is inescapable: Tax complexity is a function of democracy. No one understood that better than T.S. Adams, a leading light of the Wilson administration and one of the first Treasury officials to struggle with income tax complexity. “The historical fact is that modern states prefer equity and complexity to simplicity and inequality,” he told his colleagues. “The cry for equality and justice is louder and more unanswerable than the demand for certainty and convenience. You may think it sentimental and stupid, but that does not alter the fact.”

As Adams realized, policymakers confront a tradeoff between simplicity and equity. Or more precisely, a tradeoff between simplicity and the perception of equity. Whether or not complexity brings with it important elements of inequity, voters don't seem to see it that way. At least not when favored tax provisions are on the line.

Take education incentives as a case in point. Panelists at last week's simplification conference noted the alarming proliferation of tax incentives designed to encourage education, as well as the sometimes terrifying complexity surrounding their interaction. Clearly, this area is ripe for simplification. Yet congressional representatives on the panel reported a dearth of constituent complaints about these incentives. Apparently, voters don't complain about provisions that might save them money, no matter how complex they might be.

The implication here is profoundly depressing. There is no obvious constituency for simplification in general, but there is almost certainly a constituency for the numerous provisions that create complexity. If education incentives are any guide -- and I think they are -- we should accept reality: People hate complexity, unless it's their complexity.

The problem with the tax system, then, is not too little democracy, but too much. We have a complex tax system because voters like the countless provisions that clutter up an otherwise pristine Haig-Simons definition of income (and everything else we might build into our ideal tax system).

And it was always thus. Before the income tax, the principal vehicle for this sort of political pandering was the tariff. And excise taxes. Since the early days of the Republic, Americans have lived with an inherently political revenue system, subject to all the nasty, dirty compromises that go into every other piece of legislation. That won't change, nor should it.

What's really depressing about simplification is the realization that success -- should it improbably materialize -- would be fleeting. The political dynamics that cluttered up the tax code in the first place would soon get to work cluttering it up again. The fate of the Tax Reform Act of 1986 in the years since its passage should make that clear.

So What to Do?

Short of throwing up our hands and buying stock in H&R Block, what can would-be simplifiers do?

First, accept that nothing is forever, but soldier on for reform nonetheless. As the 1986 reform demonstrated, sometimes the improbable does happen. And when it does, it's the result of all the meetings, articles, and conferences that come before it. If simplifying reforms are later undone, then so be it. As a wise old tax hand once said, it's like cleaning out your closet: You need to do it every once in a while, just to keep things under control.

In a more immediate sense, legislators should think boldly. Voters might be sold on simplification if the payoff seems dramatic enough. House Ways and Means Committee Chair William M. Thomas, R- Calif., said much the same thing in his speech to the simplification conference. If only he would take his own advice -- his plan for abolishing the corporate AMT constitutes something less than wholesale simplification.

Ultimately, the political fate of simplification will depend on political leadership. Once again, the 1986 reform can be a guide. Ronald Reagan may have come late to the tax reform party, but his support proved critical in the final stages.

Several speakers at the simplification conference suggested that the looming AMT problem may provide a vehicle for larger simplification reforms. Perhaps, but let's hope that policymakers use it to advance a broad reform agenda. Political genius lies in the ability to use small issues to leverage big change.