3 Million Tax Army Zombies

Happy April 15th. Another dreadful tax filing is behind us. What an energy sapping, demoralizing process. You’re literally penalized for your success. “[F]ederal tax-code compliance overall consumes more than 6 billion hours of time each year, which is like having a “tax army” of 3 million people just filling out tax returns year-round,” writes my friend Chris Edwards, the director of tax policy studies at the Cato Institute. Edwards continues:

The problem is getting worse. Federal tax rules span about 75,000 pages today, which is three times more than when President Jimmy Carter called the code “a disgrace to the human race.” The problem is that Congress micromanages us with ever more tax credits, deductions and exemptions for education, energy, health care, saving, working and other activities.

The latest layer of complexity was added by the Affordable Care Act, which manipulates our health choices through the tax system. If you don’t have health insurance, you calculate how much you get penalized. If you do have individual insurance, you calculate the tax credits you receive. If you get advance credits during the year, then you recalculate your benefits when you file. And so on.

You can try to figure all this out by looking at the IRS’s 24-page Affordable Care Act overview, its 19-page guide for penalties and its 71-page guide for credits. Or you can go to a tax practitioner who is familiar with the thousands of pages of related regulations.

The Affordable Care Act has become a tax-filing nightmare, but so have other parts of the code, such as the earned income tax credit. The IRS guide for the earned income tax credit is 37 pages long, and the rules are so complicated that the credit’s error rate is 27%, according to the IRS. That amounts to $18 billion of mistakes every year for just for this one credit.

These days, most people get their returns done by tax-preparation firms, but that doesn’t solve the complexity problem—indeed, the pros make many errors as well. A 2014 investigation by the Government Accountability Office of 19 paid tax preparers found that most of them calculated incorrect refund amounts on sample returns. Furthermore, expert tax preparation costs money—last year the average charge for 1040 return prep was $273.

In addition to the monetary costs, the tax code’s complexity:

Increases avoidance and evasion.The earned income tax credit’s complexity has spawned an industry of fraudulent return filing, which costs billions of dollars a year. There is a similar problem with large corporations. We have the highest-rate and most complex corporate tax code in the world, which has created a breeding ground for widespread tax avoidance.

Undermines financial planning.For families, the tax code complicates decisions about retirement savings, paying for education and other life events. For businesses, the tax effects of hiring workers, investing in capital equipment, and other decisions are constantly changing as new laws and regulations are imposed. The IRS Taxpayer Advocate counted 4,428 federal tax rule changesover a 10-year period.

Creates “horizontal inequity.”People with similar incomes pay different amounts of tax because of all the special breaks. Homeowners, for example, can have a tax advantage of thousands of dollars a year over renters. Such inequities violate the principle of equality under the law.

Here Edwards talks about what the government is spending all that money on.

FLASHBACK VIDEO: Chris Edwards discusses taxes on Tax Day back in 2012

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E.J. Smith - Your Survival Guy

Preparing your investments and family for when disaster strikes.

E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.