One of the major reasons the U.S. tax code currently runs to over 73,000 pages in length is that it contains a huge number of targeted exemptions, designed to encourage behavior the government finds desirable. In this way, the tax code long ago lost sight of its mission as a method of efficiently funding the government, with the minimum possible imposition upon the rights and liberties of American citizens. It has, instead, become a medium for the exercise of vast power ??? an instrument of control.
The revenue lost due to these exemptions is often cited as justification for raising taxes in other areas. It also leads to disastrous ???corrections??? like the Alternative Minimum Tax and its various progeny, which are essentially punitive traps that snap shut when too many lawful deductions are properly taken by individuals and business entities. This is another way of saying that many of those 73,000 pages are a mirage ??? if you???re too aggressive about engaging in the activities government wants you to pursue, and claim too many of the associated rewards, other sections of the tax code will activate and take those rewards away from you.
If all that sounds terribly complicated to you, it should be interesting to learn that many business executives agree. The Wall Street Journal ran an interesting article by John D. McKinnon over the weekend, reporting that many small and medium-sized companies are passing up on targeted tax deductions because they???re ???too cumbersome and confusing,??? making the cost of obtaining the benefit ???greater than the benefit itself.??? They???re also worried that any errors made when claiming these complicated benefits could result in an unpleasant encounter with the Internal Revenue Service.
As a result, these smaller firms are paying more taxes than legally required, making targeted incentives offered by central planners in Washington far less effective than promised. One example mentioned by the Journal is a tax credit designed to incentivize businesses to hire more young people, felons, and welfare recipients. Whatever the merits of this program, its actual effects have been negligible, because companies are only claiming the credit for 20 to 35 percent of eligible employees. Another ???energy efficiency??? credit requires so many expensive studies that it???s simply irrational for any but the largest corporate renovation effort to claim it.
Large corporations, on the other hand, can afford the battalion of highly skilled tax accountants necessary to navigate the incentive maze. Once again, we see that Big Government produces an environment most favorable to Big Business, contrary to the populist rhetoric employed to sell the public on support for political micro-management of the economy.
Tax code compliance eats up a full 1 percent of our Gross Domestic Product, so radical tax simplification would be far more powerful and immediate ???stimulus??? than any Keynesian spending bill. Our high corporate tax rates and complex rules are also a profound competitive disadvantage on the international scene.
And perhaps worst of all, the complexity of the tax code protects politicians from accountability for their policy errors. They can claim they???re taking strong action and passing ???jobs bills,??? when the actual result is one more obscure subroutine vanishing into a million lines of sloppy tax programming. The private sector is routinely demonized for exploiting the tax code in some vaguely unfair manner, even though empirical evidence shows they???re actually missing out on a great deal of the deductions they???re entitled to claim. The exercise of control through mutation of the tax code is usually portrayed as revenue-neutral at first, but these deductions can magically transform into ???spending??? in a heartbeat, when desperate politicians wish to demagogue them.
The tax code should be a simple, impartial system for funding government, not an instrument of government. Instead, it???s a billowing cloud of blue smoke containing a maze of mirrors, in which far too many politicians hide. Quite a bit of our tax law is literally all but useless. Americans have developed far too much tolerance for useless laws.