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What's So Complicated about Simplifying Taxes?

By Howard Gleckman I don't know what's more painful this time of year -- doing my taxes or listening to politicians pontificate about how complicated the tax law is. It's the season when promises to simplify the revenue code sprout like dandelions on my lawn. Not to be unkind about it, but most politicians who tell you they want to clean up the tax laws are lying. They want, in fact, to make them even more complex.

Let's start with President Bush's $1.6 trillion tax plan, which he sometimes calls reform. His proposed tax cut is nice, although a little big for my taste. But it has nothing at all to do with tax simplification.

SAME PROCESS. The foundation of his plan is a broad rate cut. Rate cuts are good, but they don't make it any easier to do your taxes. Think about it. To figure out how much you owe, all you do is go to the tax table, find a number based on your income and the appropriate rate, and copy it down. Even if your rate is cut, you'll go through exactly the same process.

Bush could have done some things to simplify the rate structure. For instance, he might have abolished the phaseouts of personal exemptions and itemized deductions that now hit top-bracket taxpayers. He could have. But he didn't.

For the most part though, simplification isn't about tax rates -- it's about what is taxed. And the more the code is littered with targeted tax breaks to encourage certain behavior, the more complicated it's going to be.

And Bush has proposed plenty of those. Bill Gale, a tax economist at the Brookings Institution, found 24 targeted tax breaks in the Bush plan. You'd get incentives for -- among other things -- getting married, having kids, saving money for their college, buying health insurance, caring for elderly family members, and installing rooftop solar panels. You could also get tax breaks if your company gives you an old office computer, you adopt a kid, or you give to charity without itemizing.

MORE STUFF. Now, many of these are wonderful things. And we can argue about whether it's the job of the tax code to encourage them. But what is beyond argument is that having this stuff in the tax code makes life more complicated for everyone who does a return. More lines. More stuff to figure. More headaches.

But the worst thing Bush's plan does is throw millions more people into the alternative minimum tax: a separate tax that excludes the benefit of some deductions and credits. If your tax liability falls below a certain level, you must calculate the AMT. It's a nightmare. Trust me on this. I've done it. You don't want to.

In 10 years, 20 million people will be thrown into the AMT. Since Bush's plan cuts taxes so much, a staggering 36 million would get hammered if his plan becomes law. The President and most members of Congress say they'll fix this. But that would cost $300 billion. And remember what I said about pols who promise to make the code simpler.

The Democratic alternatives aren't much better. Since they aren't fully fleshed out, it's hard to analyze any new complexities they might add. But one thing is certain: They won't make the code much simpler.

SOFTWARE CRUTCH. As you can imagine, accountants aren't opposed to complexity. Their livelihoods, in fact, depend upon it. But economists favor simplification, mostly because they hate the idea of using the tax law to encourage behavior. And even they've just about given up on the idea. "Nobody's even listening anymore," Gale says.

Perhaps that's because so many of us are using tax software, which makes it easier to deal with the junk the pols throw in the code. Maybe it's just because we're tired of hearing the empty promises. Or maybe we're all waiting for the day they'll have a tax credit for getting rid of those dandelions. Gleckman is a a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington Watch, only on BW Online

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