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Why Is the Tax Code So Intensely Complicated?

by
Steward Financial
on
1/22/2020
Why Is the Tax Code So Intensely Complicated?

Note: The tax filing and payment deadline for 2019 tax returns has been delayed from April 15, 2020 to July 15, 2020.

Title 26 of the U.S. Code, or Internal Revenue Code thus informally dubbed "the tax code," is a twisted and leviathan beast that has baffled millions of hapless taxpayers over the years. Even people with relatively simple tax returns, like having income from one job reported on a W-2 and no dependents, find themselves stymied trying to understand the numerous publications and interpretations of the tax code that only seem to get more complex every year due to updates.

Even without sweeping changes like the 2018 tax reform that made several material changes to both business and individual provisions (most of the former became permanent, and most of the latter expire in 2025), the tax code just seems needlessly complex. Why is this? How did we get here?

A Brief History of the Tax Code

Income taxes were first levied in 1861 to help finance the Civil War. The Internal Revenue Act of 1862 then gave way to the Bureau of Internal Revenue, the agency that would eventually become the IRS. The Bureau of Internal Revenue mostly collected excise taxes on items like tobacco and jewelry. While income tax collection and assessment were one of the agency's functions, the federal government ceased to levy income tax once 1872 rolled around since the Bureau of Internal Revenue created federal estate and gift taxes.

However, these taxes were sunset after the Civil War ended but were brought back with the War Revenue Act of 1898 to finance the Spanish-American War.

Not dissimilar to today, income taxes were not a very popular policy in this era. The Supreme Court eventually overturned the remainder of the taxes targeting higher-income taxpayers in 1895, which was the Wilson-Groman Tariff that only taxed income at a rate of 2% of annual income exceeding $4,000. In 2020 dollars, this is roughly $122,500. Americans who earned this much, or more, were not as large of a group as they are today.

Income taxes then garnered support in the early 20th century and were enacted into law in 1913 with the ratification of the 16th Amendment. Congress now had the power to tax personal income at the source. The first 1040 tax return was drafted in 1914, and tax brackets were created with the Revenue Act of 1916, although Congress already had concerns that the tax code was going to be too complex to properly administer.

However, once Congress saw how collecting taxes on personal income from working people at the source proved to be far more effective than waiting until people died or gifted very large sums of money, the income tax was there to stay.

When and Where Taxes Got Messy

The income tax is based on a "pay as you go" methodology. For instance, if you had a job paying $100,000 per year in 2019 and get laid off, but the next job you can find in 2020 only pays $60,000 per year, provided that you don't have any other income, then you would not be in the same tax bracket.

In the early days of the income tax, people were confused by this concept. By World War II, Congress found it was easy and effective to finance war efforts by withholding taxes from paychecks instead of waiting for people to calculate their income tax and mail in checks. However, questions of tax fairness would be raised. Why should two married couples with comparable incomes pay the same rate if one couple has children and the other does not? Is it fair to tax a seamstress living in a New York tenement the same as a farmhand living in rural poverty in Kansas, since their incomes are both low, but one has a significantly higher cost of living?

Upon making attempts to address inequities in the tax code, Congress realized it could socially engineer through the tax code. Philanthropic organizations, the real estate industry, and numerous other forces realized the same thing, and what was a concern in 1915 was easily waved off by the time the 1970s rolled around.

Complexity Comes with a Price

Despite the concern from taxpayer advocacy groups and collective complaints from taxpayers, the tax code doesn't seem to be simplifying any time soon. Lawmakers keep promising to do so, but then the industries that lobbied for these changes to go or stay in place would pull their funds from said lawmakers and political action committees or cause other forms of destabilization.

However, the complexity has a price. The length of the tax code changes every year, but it is estimated to be roughly 5.6 million words. Individuals and businesses alike end up not taking advantage of money-saving tax breaks because they do not understand these matters and fear being audited; or perhaps they don't even know the breaks exist if they're not widely discussed.

Working with a tax professional can help mitigate the complexity of the tax code since these professionals dedicate their careers to navigating the code itself, as well as IRS protocols and procedures. Additionally, enrolled agents were the first tax professionals in America: The Enabling Act (also known as the Horse Act) created them to tally losses from the Civil War, and they continue to help Americans with tax problems to this day.

Jon Osborn, EA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].   

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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