by Ron Ross
If there were an award for gross mislabeling, last year's winner would be the Taxpayer Relief Act of 1997. This mess of pointless complexity and confusion is clearly not the way you spell relief.
The law added 848 pages to the tax code. It rewards, among many other things, home ownership, having children, sending those children to college and holding investments for 18 months or more. Just being manipulated into certain selected behaviors would be bad enough in itself. The affront is compounded by the detailed stipulations that have to be fulfilled to gain the rewards.
The Taxpayer Relief Act is micromanagement at its worst. Consider, for example, the special estate tax relief for "qualified family-owned business interests."
There is a long list of criteria that must be met in order to qualify. Just three of those rules are as follows: (1) The decedent or a member of his/her family must have owned or materially participated in business for five of eight years before decedent's death. (2) Each qualified heir is required to materially participate for at least five years of any eight-year period within 10 years following the decedent's death. (3) Business's stock may not be publicly traded within three years of decedent's death.
Just trying to keep track of all the time requirements would be enough to wear you out! And don't be surprised if we see an increase in the number of terminally ill business owners being kept alive on life support.
In an important sense the existence of the income tax and the way it's structured put the citizens of a country on the equivalent of an allowance. How much allowance you get depends on how well you abide by what the lawmakers have anointed as desirable behavior. The writers of the tax rules assume the role of our parents.
The overwhelming complexity of the Internal Revenue Code is a kind of brain pollution. By far our most important resource is the intellectual capacity of our citizenry. To commandeer that resource for the purpose of coping with tax minutia is a gross waste of resources. Enormous amounts of time and energy are expended on learning and understanding the tax code, keeping records, filling out forms, staying in compliance -- and inventing ways to avoid paying taxes.
According to the IRS's own estimates, Americans this year will spend 3.6 billion hours complying with the rules. We were wise enough to end the military draft. Unfortunately, we have retained and even enlarged what is effectively a draft of peoples' time and intellectual resources in the service of collecting tax revenue.
Virtually all the complexities in the tax code have some kind of a legitimate sounding rationale. Most of the rules, incentives and disincentives have as their ostensible aim the overall improvement of the economy or our society. I cannot remember ever seeing any evidence that any of these manipulations of the economy or of our behavior resulted in a net improvement.
The tax code is based on the assumption that a group of about 550 people sitting in the nation's capital can make rules that will improve the choices of 250 million diverse people across the country. It's downright ludicrous when you think about it.
Furthermore, this and the other numerous tax revisions we've had over the past decades were created over just a few months. None of the people who voted for it could possibly know and understand all the details, and especially not all the implications stemming from the changes. We're all left to cope with the inevitable flaws of a rush job.
Although I'm no fan of the IRS, the blame that has been heaped on it in the recent hearings about its procedures has missed the mark. When someone is given a dirty and impossible job, is it his fault that he screws it up?
If this had been bona fide tax relief, there would have been across the board reductions in tax rates. The Tax Relief Act of 1997 was a big step in the wrong direction. One reason to be optimistic, however, is that maybe it will finally cause enough disgust and frustration that profound tax reform and simplification will become a possibility. n
A former professor of economics, Ron Ross, Ph.D., is an investment advisor for Premier Financial Group, Eureka.