Tax law complexity

[Famspear]

I thought I would start a thread on tax law complexity -- with a few quotes about U.S. federal tax law. I actually don't agree (sort of) with some of these remarks, but I think they're interesting.

From the late Erwin N. Griswold:

We have long had death and taxes as the two standards of inevitability. But there are those who believe that death is the preferable of the two. "At least," as one man said, "there's one advantage about death: it doesn't get any worse every time Congress meets."

--Erwin N. Griswold, former Solicitor General of the United States, former Dean of Harvard Law School.

From the late Martin D. Ginsburg:

There is an ancient belief that the gods love the obscure and hate the obvious. Without benefit of divinity, modern men of similar persuasion draft provisions of the Internal Revenue Code.

From the late Professor Boris Bittker:

....the Internal Revenue Code is not what it used to be -- and never was.

--Boris I. Bittker, "Constitutional Limits on the Taxing Power of the Federal Government," 41 Tax Lawyer 3, 11, Amer. Bar Ass'n (1987-88).

From the United States Court of Appeals for the Fifth Circuit:

The Commissioner [of Internal Revenue] disallowed the Laneys' deductions because they exceeded Mrs. Laney's $1000 contribution to capital in the limited partnership. In order to understand his action, we must roll up our sleeves and delve into the latticework of the Internal Revenue Code of 1954, however much we might prefer not to.

--from Laney v. Commissioner of Internal Revenue, 674 F.2d 342 (5th Cir. 1982).

Even over 71 years ago, the United States Supreme Court referred to U.S. federal tax law as being:

...a subject that is highly specialized and so complex as to be the despair of judges.

--from Dobson v. Commissioner, 320 U.S. 489, 498 (1943).

More from the year 1943:

At the present time, it is impossible to obtain a really authoritative decision of general application upon important questions of law for many years after the close of any taxable year. The average period between the taxable year in dispute and a Supreme Court decision relating thereto is nine years. Meanwhile confusion reigns in the day-by-day settlement of the more debatable questions of the tax law. One circuit court holds that a certain situation gives rise to tax liability; another circuit holds the contrary. The Commissioner and the lower federal courts are both confronted with the problem of reconciling the irreconcilable. A great part of the criticism of changing interpretations of the law announced by the Commissioner of Internal Revenue is properly attributable to the multitude of tribunals with original jurisdiction in tax cases, and to the absence of provision for decisions with nationwide authority in the majority of cases. If we were seeking to secure a state of complete uncertainty in tax jurisprudence, we could hardly do better than to provide for 87 Courts with original jurisdiction, 11 appellate bodies of coordinate rank, and only a discretionary review of relatively few cases by the Supreme Court.

--from Roswell Foster Magill, ''The Impact of Federal Taxes'', p. 209 (1943), as quoted in footnote 26 of Dobson v. Commissioner, 320 U.S. 489, 500 (1943).

From Judge Learned Hand:

In my own case the words of such an act as the Income Tax… merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception -- couched in abstract terms that offer [me] no handle to seize hold of [and that] leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters [the federal income tax statutes] are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance[,] save that the words are strung together with syntactical correctness.

--from the article by Learned Hand, ''Thomas Walter Swan'', 57 Yale Law Journal No. 2, 167, 169 (December 1947).

If Patrick Henry thought that taxation without representation was bad, he should see how bad it is with representation.

--Farmer's Almanac, 1966.

EDIT: edited once to expand a citation.

[Duke2Earl]

There is little to really say about this other than the people that matter want it to be complicated. Due to a unusual confluence of circumstances that could almost certainly not happen today we got a fairly substantial simplification of the Code in 1986. Within a very few years it had been junked up again and today it is worse than ever. When I started in tax the Income Tax Regulations were three fairly thin paperback volumes. My mentor at the time told me he remembered when the regulations were only one volume. Today I believe that the regulations encompass 6 very fat volumes and the exact same thing has happened to the Code itself.

The concept of simplification is hampered by the fact that although about everyone says that they want simplification, they actually mean very different things. There is the gang that wants a flat tax but ignores that would have profound economic implications and many, many people would be hurt by that. There is the sales tax (VAT) gang which ignores that both the incredibly profound both social and economic implications of that and also seem to be under the fantasy that sales taxes need no one to enforce them. And there is the gang that wants to simply reduce deductions and preferences and thus being able to reduce rates but that group seems to ignore that every one of those deductions and preferences is there for a reason and has a constituency.

As for me personally, if I were made god of taxes I would prefer to focus on making changes incrementally so as to reduce the economic implications. I would phase out the different treatment of capital gains from ordinary income which by itself would reduce hundreds of pages from the Code and regs and was done in 1986. I believe that in simple fairness no one's income should be more blessed that anyone else's. But I would go for a phase out over time to reduce economic dislocations. I would make changes to reduce stupidity like eliminating the corporate deduction for domestic production activities. I would slowly phase out a large number of deductions and credits from both the individual and corporate sides. But in the poisoned atmosphere of today nothing really sensible is possible and the concept of doing things over time is a non starter. So the madness continues unabated.

[Judge Roy Bean]

... every one of those deductions and preferences is there for a reason and has a constituency. ... So the madness continues unabated.

I hate to say it, but it will continue until a sufficient number of net-payers decide to do something about it.

[Famspear]

There is little to really say about this other than the people that matter want it to be complicated. Due to a unusual confluence of circumstances that could almost certainly not happen today we got a fairly substantial simplification of the Code in 1986. Within a very few years it had been junked up again and today it is worse than ever....

I find it difficult to put my finger on what simplification and complication really are.

The Tax Reform Act of 1986, which you describe as providing a "substantial simplification" of the Internal Revenue Code, runs 879 pages of single-spaced text in the United States Statutes at Large. And the Joint Committee's official explanation of the 1986 Act runs 1,395 pages. The '86 Act did such things as bringing us the passive loss rules and, if I recall, it re-complicated the previously relatively simple accelerated cost recovery system (ACRS) system for depreciation deductions that had been enacted in 1981.

[Duke2Earl]

I find it difficult to put my finger on what simplification and complication really are.

The Tax Reform Act of 1986, which you describe as providing a "substantial simplification" of the Internal Revenue Code, runs 879 pages of single-spaced text in the United States Statutes at Large. And the Joint Committee's official explanation of the 1986 Act runs 1,395 pages. The '86 Act did such things as bringing us the passive loss rules and, if I recall, it re-complicated the previously relatively simple accelerated cost recovery system (ACRS) system for depreciation deductions that had been enacted in 1981.

I guess it depends on what you are trying to accomplish. The passive loss rules were indeed a complication but they, by basically gutting the tax shelter industry are responsible for the sudden passion for tax reform by rich folks by in essence requiring rich folks to actually pay taxes. Before the passive loss rules, it was so easy for rich folks to avoid actually paying any taxes that they really didn't care about marginal rates.

Yes, the mucking up of ACRS by enacting MACRS was unfortunate. But the removal of the ridiculous investment credit and the elimination of lower capital gains rates more than made up for it in my judgment.

[Famspear]

....Before the passive loss rules, it was so easy for rich folks to avoid actually paying any taxes that they really didn't care about marginal rates.

Yeah, in the late 1970s and early 1980s, I saw lots of higher income folks (e.g., physicians, etc.) who were limited partners in real estate tax shelters who were able to deduct their share of the partnership losses against the income they earned in, say, a medical practice. You didn't care so much about a marginal tax rate as high as 50% on earned income (or 70% on dividend and interest income, if I recall correctly) where your deductions prevented you from ever hitting those highest tax brackets.

It was kinda fun, though, as a young cub accountant, watching how that worked, as I prepared partnership returns and individual returns. "Fun," in a twisted sort of way, I guess.

[Famspear]

Another quote, this one from the U.S. Court of Appeals for the Fifth Circuit:

The income tax laws, as every citizen knows, are far from a model of clarity. Written to accommodate a multitude of competing policies and differing situations, the Internal Revenue Code is a sprawling tapestry of almost infinite complexity. Its details and intricate provisions have fostered a wealth of interpretations. To thread one's way through this maze, the business or wealthy taxpayer needs the mind of a Talmudist and the patience of Job.

--from United States v. The El Paso Company, 682 F.2d 530, 534 (5th Cir. 1982), cert. denied, 466 U.S. 944 (1984).

[Duke2Earl]

The El Paso quote is quite true. I, however, personally benefited from the quagmire. The obvious disaster known as Tax Law provided me with a good living for many years and a so far pretty good retirement. Despite that however, I, and darn near every tax professional I know, would be in favor of a rational simplification. For example, 95+% of individuals should be able to file on a post card and could with a few basic changes. And most tax professionals don't make any money from those folks anyway.

[Cpt Banjo]

Another 5th Circuit observation:

This petition brings up for solution one of those difficult jigsaw tax law puzzles all too common in the present deplorable crazy quilt patchwork state of the Internal Revenue laws. Of this one we think it may be truly said, "This kind cometh not out save by fasting and by prayer". Houston Textile Co. v. Commissioner, 173 F.2d 464 (5th Cir. 1949)

[Famspear]

Another quote -- this one from 67 years ago:

It is fairly obvious that it is impossible to devise an income tax which is both just and simple. Simplicity is predicated upon a minimum of hard and fast rules which leave no room for the concessions to individual equities demanded by justice. The incompatibility between justice and simplicity does not mean, however, that either ideal must be abandoned entirely. Although it may not be feasible to construct a just and simple income tax, there should be a constant striving for the simplest law consistent with fairness. Complicated provisions of the tax law, which foster rather than mitigate injustice, are doubly damned, because they are both complex and unfair.

--from Charles L. B. Lowndes, “The Taxation of Stock Dividends and Stock Rights,” 96 Univ. of Pennsylvania Law Review 147 (Dec. 1947).