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The Myth of Tax Simplification

“The hardest thing in the world to understand is the income tax.”–Albert Einstein

“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money.”–Arthur Godfrey

“In 1790, the nation which had fought a revolution against taxation without representation discovered that some of its citizens weren’t much happier about taxation with representation.”–Lyndon B. Johnson

Having recently passed Tax Day, while it is still on our minds, I want to address the current political issue of Tax Cuts and Tax Simplification. Republicans are touting the case for simplification of the existing U.S. Tax Code. The Trump Tax Plan reduces the number of tax brackets. Proponents of the Flat Tax prefer a single tax rate.  Either would be an improvement, but not much of an improvement!

All the proposals have one thing in common; they are intensely complicated. Why, you might ask, is the Flat Tax complicated?  After all, it simply applies a fixed tax rate to Taxable Income. Some Flat Tax proposals have a couple deductions remaining; others have none. But they have 1 thing in common. They apply a single tax rate to Taxable Income.

You probably spend most of your tax energy finding deductions. But have you ever considered the complexity of determining your Taxable Income? Depending on your circumstances, it can be a major headache. Vast portions of the 73,000+ page Tax Code are devoted to the calculation of Taxable Income. Most of this would have to remain intact.

Form 1040EZ is used by people who have only the simplest tax situation. Even Form 1040EZ is a full page long, and it has a page 2 for instructions. Can it really be shrunk to a postcard, as many of our elected officials are promising?

Only 13% of American taxpayers can use Form 1040EZ, because most people have other forms of income and deductions that disqualify them from the simple filing format. They must use the longer Form 1040. Can tax reform enable “most Americans” to use a postcard? Not in my opinion.

CFPs are not tax preparers, unless that designation is earned separately from other training and testing. We do have expertise in tax planning, and this CFP understands that there is little chance of ever seeing a “postcard” tax filing form. The myth lives on, if only because it sounds good to frustrated taxpayers.

Van Wie Financial is fee-only. For a reason.