Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

TAX COMPLEXITY: BLAME IT ON THE HP 12-C?

April 19, 2005

A number of folks have suddenly noticed how the proliferation of computer techology has enabled the mind-numbing complexity of the tax law. The same technology that puts the computing power of the lunar landing program on your lowly laptop gives Congress the ability to put tax laws of intergalactic complexity on your 1040.

Blame the 12-C?

Law professor and occasional tax blogger Jack Bogdanski (via the TaxProf) says technology began to create tax complexity in the early '80s, before most tax accountants had discovered the 5-inch floppy disc:

This phenomenon is not entirely new. For example, a couple of decades back, the tax laws got much more complicated when Congress discovered the sheer beauty of cheap, handheld financial calculators, such as the classic Hewlett-Packard 12C. Once the tax staffers on Capitol Hill saw how easy it was to figure out compound interest, many important tax calculations suddenly required that such calculations be made. As one tax pro put it to me over the water cooler back in my practicing lawyer days, "The 12C created the O.I.D. rules."

I had always blamed Bob Dole. I never had him pegged as a cutting edge techie.

The libertarians at the Reason blog write of "TurboTax and Leviathan." The post points to a New York Times op-ed that points out how tax software takes the labor, if not all the pain, out of the alternative minimum tax:

In a world without paid preparers and TurboTax, taxpayers would face the tedious process of calculating their taxes twice - once under the regular income tax and once using the cumbersome alternative minimum tax rules. But software does that calculation in the blink of an eye - and for taxpayers who have to pay the tax, tell them how to adjust their withholding so that next year they won't even notice that they're paying it.

It's not just the libertarians and the New York Times center-lefties. The non-leftie Thomas Donlan at Barrons also notices (link works only for Barrons online subscribers):

Unfortunately, Congress also owns a lot of computers and it has used them to draft ever more complex deductions, benefits and exclusions from regular taxes. The tuition tax credit rolls back for persons above income level A, but the tax credit for electric vehicles continues in full effect until income level B. Other credits also vanish slowly, like the Cheshire cat's smile, at income levels C through ZZZ, and at different rates of reduction.

Though, confused, inane and devoid of reason, these complexities are no longer painful. Turbo Tax, Microsoft Money and the army of low-cost tax preparers have given taxpayers an even break in computational skill. Now Congress is free of any subtle requirement to keep tax computation within the bounds required by an innumerate public, because the public has its personal computers to figure percentages and carry from the tens' place to the hundreds' place.
This is not all to the good: Taxpayers who just fill in the blanks and let the PC or preparer do the calculating are not getting mad about the fearsome complexities added to the tax code. They do not resent the stupid inequalities of the code, inserted in the name of fairness to soak the middle-class "rich." If they never have to look at a tax table, they can remain oblivious to marginal tax rates and never notice that the government in Washington thinks it highly appropriate to claim?? an increasing percentage of their income as a price of success.

The only thing that's new about this, as Mr. Bogdanski's piece indicates, is that people are noticing how much the P.C. has fueled tax complexity. Preparers figured this out long ago. Off the top of my head, it's easy to list many tax provisions other than the AMT that computers enable:

-Passive loss rules. Without P.C.s, it would be ridiculously hard to determine the amount of passive losses disallowed, allocate the disallowance among your passive activities, compute the portion of the special allowance for active participation rental real estate and its phase-out, and maintain carryforward records.

-Depreciation. Compute it for 3,5,7, 15, 27 1/2 and 39 year property, double-declining balance (or 150% declining balance, or straight-line) and then compute it again a different way for alternative minimum tax, by hand. I'll wait.

-Phase-outs. The IRA deduction. The Roth IRA. Itemized deductions. The AMT exemption amount. Earned Income Credits. The Savers Credit. Education credits. The deduction for student loan interest. All of these phase out at different income levels. Imagine trying to do these computations by hand.

-Carryovers - net operating losses, AMT credits, general business credits, excess Section 1231 losses, excess capital losses, all are nicely carried forward by modern computer software.

-Consolidated returns. Sure, people did consolidated returns by hand back before computers. That was when you could hire all the new staff accountants you wanted for $18,000 per year, and they'd work like slaves and like it. A pool of skilled typists solved your legibility problem through typing drudgery.

Apart from any single complication, the sheer volume of computations makes doing returns by hand prohibitively tedious. Sure, computing any single phaseout isn't a daunting task. But computing a half dozen in the right order becomes a challenge. And then do it all over because a corrected 1099-DIV arrives in the mail...

Still, we can't really blame the P.C. for the complexity of the tax law. The computers don't write the bad laws; Congress does. And we elect the congresscritters. As always in data processing -- garbage in, garbage out.