RESEARCH Business Labor

TAXES
Filing taxes easier than ever, but tax planning has become too complex

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

11/1/2000

CHAMPAIGN, Ill. -- One of the most persistent themes in the debate over federal taxes is that the U.S. tax code is too complex and should be simplified.

Concern over proliferating tax provisions has been so widely shared by Republicans and Democrats alike that Congress created a special commission to determine how to simplify the operation of the federal tax system -- in 1925.

"Why have decades of political promises to correct the situation failed to do so?" University of Illinois Law Professor Richard L. Kaplan asked in a lecture delivered last month at the UI College of Law. One reason is that the tax code is really not that burdensome to the average filer. "The unheralded fact is that tax complexity in terms of compliance, namely the annual tax-return ritual, has actually improved for most taxpayers."

More than 46 million taxpayers file Form 1040A or Form 1040EZ, the latter only 12 lines long, and a growing number of filers use a touch-tone telephone. What's more, tax-preparation software is readily available and inexpensive. "Tax compliance has never been easier," Kaplan said, "and the ongoing computerization of personal finance will make it even easier in the future."

What has grown "infinitely more complex" is tax planning for the average family in two key areas - savings for college and savings for retirement. In the realm of private retirement savings, for example, different tax provisions govern 401(k)s, regular IRAs, Roth IRAs, SEP-IRAs, Keoghs, SIMPLEs, and TSAs. "We tell Americans that they should not rely exclusively on Social Security for retirement, but then we overwhelm these same Americans with a bewildering array of alternatives, conflicting and uncoordinated definitions, and different dollar limits, inflation-adjusted formulas and eligibility criteria," the UI tax expert said.

Most alarming is that most of these provisions are the product of the last decade of legislative action. "Regardless of which political party is in power, Congress is pathologically incapable of leaving the tax code alone," Kaplan said.

How to solve the problem? By stopping legislators from using the tax code to implement various social policies and by focusing attention on the benefits of simplification for all parties.

This was done when tax laws governing alimony and child support were overhauled by Congress in the 1980s. Model legislation was drafted by representatives of the American Bar Association, the American Institute of Certified Public Accountants and technical staffs in government, then enacted with almost no input from the politicians.

"Whole areas of controversy were eliminated, and few aspects of these subjects are ever litigated anymore, which proves that lasting tax simplification can be accomplished if you minimize the role of politics."