[Ed. This article is an eye-opener.]
The annual American nightmare
By the time the sun sets on April 15, the average taxpayer will have spent 28 hours wading through forms and records in the struggle to give the government its due. How did income taxes get so complicated? How complex is the tax code?
It is a 17,000-page marvel of dense wording and purposeful obscurity. To fully grasp all the rules, loopholes, and shelters, you must wade through another 47,000 pages of Internal Revenue Service regulations, court cases, and other “clarifications” compiled over the years. Sixty years ago, when the stack of documents was a fraction as high, Albert Einstein groused that “the hardest thing in the world to understand is the federal income tax.”
Was it always this way?
No. From the nation’s founding until the early 20th century, the federal government was funded through tariffs and excise taxes. There was no income tax at all, except a temporary version imposed to finance the Civil War. The first peacetime income tax was imposed in 1913, during the Progressive Era, as a means to force the very wealthy to contribute to society. The code spanned just 14 pages. The rate was 1 percent on individuals with a net income of $3,000, after deductions and exemptions. It rose gently to a high of 7 percent on those making $500,000. But the simplicity was short-lived. New rules were added, and dodging the tax man quickly became a national pastime. The income tax, the humorist Will Rogers declared in 1923, had “made liars out of more Americans than the game of golf.” But public resentment did little to deter the government.
Why not?
Congress quickly developed a dependence on the vast revenues income taxes could produce. Gradually, the percentage of Americans required to send the government a check crept up from 1 percent to 14 percent. At the onset of World War II, Congress lowered the income threshold and passed a law ordering employers to withhold tax money from workers’ paychecks. Revenue doubled, as the number of Americans covered by the tax jumped from 4 million, in 1939, to 43 million, in 1945. Taxes on the wealthy, meanwhile, shot up even faster, with the top tax bracket peaking at 91 percent during World War II.
How did this go over?
As you might expect. Under intense public pressure, lawmakers tinkered with the tax for decades, dropping rates after World War II was won, then jacking them up again during the Korean War. In the 1960s and 1970s, provisions were added to again make the wealthy pay a greater burden. Then, during the conservative Reagan and George W. Bush presidencies, the top tax rates were lowered again, on the theory that taxing the wealthy discouraged initiative and investment, and hurt the economy. But through these changing philosophies about taxation, there’s been one constant: Every year, Congress has made the tax code more complicated.
What’s the purpose of that?
It started out innocently enough. Initially, taxpayers were only able to deduct local and sales taxes, and interest payments on home mortgages and other loans. In 1924, a senator slipped into a new tax bill a provision intended to allow a wealthy Philadelphia nun to give her fortune to charity without paying taxes on it. The unlimited charitable deduction was born, and other taxpayers quickly calculated how to use it to lower their own tax bills. Over ensuing decades, lawmakers added hundreds of special deductions and loopholes to benefit individuals or small groups of taxpayers. By the 1970s, the number of special-interest tax breaks was exploding.
Why did that happen?
An army of lobbyists devoted to tax relief for specific constituents had set up camp in Washington. Using campaign contributions as a means of persuasion, they targeted congressmen and senators on committees that wrote tax law—to good effect. In one 1986 “tax reform” bill alone, an Illinois Democrat inserted a provision saving a Chicago utility $150 million; an Oregon Republican exempted a rail-car leasing company from the repeal of two earlier tax breaks; and a New York Democrat got five doctors excused from taxes on money they had made from developing vaccines.
Is this still going on?
In spades. In 2003, Congress opened a new loophole permitting small businesses to deduct up to $100,000 for the cost of a new SUV. The environmentally conscious got a tax break of $2,000 for buying a hybrid vehicle. Adoptive parents were given credits of up to $10,000 per qualifying child, to cover expenses. Teachers were allowed to deduct up to $250 for supplies they pay for out of pocket. On and on it goes. With such arcana to sift through, roughly half of taxpayers simply throw up their hands and hire a professional to fill out their returns.
Why not just simplify the code?
The idea has been around for a long time. Publisher Steve Forbes, a 2000 Republican presidential candidate, advocated setting fire to the tax code and imposing a flat tax of 17 percent—with no deductions whatsoever. The idea has its merits, but horrifies innumerable powerful interests and frightens the average taxpayer, even if it would lower his overall tax obligation. In a recent poll, 56 percent of Americans said they would oppose simplifying the tax code if it meant they’d have to give up any of their own deductions.
Making the middle class pay
The more Byzantine the tax code becomes, the better it is for the wealthy. Between 1995 and 2000, as thousands of pages of tax regulations were added, the 400 richest Americans went from paying 30 cents on the dollar in income taxes to just 22 cents. The reasons for that are simple enough, says New York Times reporter David Cay Johnston, who spent nine years studying the tax system for his book Perfectly Legal. Only the wealthy and corporations have enough money to influence federal lawmakers to write specific exemptions, and to hire the expert attorneys and accountants who know how to lower their taxes to an absolute minimum. A New York tax lawyer, for example, once devised a way for Bill Gates—the richest man in America—to take $200 million in Microsoft stock profits without paying a dime in taxes, even though he theoretically owed $56 million in capital-gains taxes. Dozens of similar loopholes also exist for corporations: Simply by opening a post-office box in Bermuda, Ingersoll-Rand saved itself $40 million in corporate taxes. As the wealthy and corporations exploit the growing number of loopholes, Johnston says, the burden on everyone else necessarily grows. He says that when you factor in all taxes—including sales taxes, Social Security taxes, and income taxes—“the richest 1 percent are taxed more lightly than the middle class.”
http://www.theweekmagazine.com/briefing.asp?a_id=574 
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