Tax Simplication

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Everyone agrees that the cost of complying with the tax laws is a dead weight loss to society. It doesn't directly produce anything, doesn't increase revenues to government, and costs taxpayers money. Much of the cost of compliance with tax laws comes from their complexity. But, while there would seem to be a great deal of agreement on the desirability of a simple tax system, in practice, politics generally favors individual tax savings, over systemic complexity. With occassional exceptions (the 1986 tax act and the 1976 unification of the gift and estate taxes come to mind), the tendency has been to make tax law more complex, rather than simpler over time.

There is also considerable public confusion over the source of this complexity. Multiple progressive tax rates have a negligible impact. Almost all of the complexity is involved in the rules for determining the taxable income to which these rates should be applied.

Among the most technical and complex areas of the tax law are the rules for depreciating, amortizing and depleting capital investments, the rules governing retirement plans, the rules governing the taxation of corporations and partnerships, the rules governing international taxation, and the rules governing gift and estate taxation.

The American Jobs Creation Act of 2004 has done more to add complexity to corporate taxation than any tax bill in decades (perhaps ever), by breaking corporation income into two categories, manufacturing and non-manufacturing, even thought it has made some progress in simplifying one aspect of individual income tax returns, the definition of a qualifying child for the purpose of various tax benefits.

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