Congress Needs to Be More Budget-Minded

With the tax year closed, thoughts of those of us who write about the economy naturally drift towards April 15th, when all chickens come home to roost.  And, of course, the terrifying complexity of it all--we're going to have to hire an accountant for the first time this year, because two journalists with freelance income and deductions are not really qualified to prepare their own taxes, even with the help of TurboTax.

Andrew looks over Howard Gleckman's summary of the National Taxpayer Advocate's report, which points out that our monstrosity of a tax code is more complicated than a soap opera, and harder to comply with than a mother's directives to her children half an hour before the mother-in-law arrives for a week.

Each year for the past decade, Nina Olsen, the National Taxpayer Advocate at the Internal Revenue Service, has issued a report to Congress on the most serious problems facing taxpayers. She usually focuses on individual provisions of the code, such as the Alternative Minimum Tax, or vexing tax administration problems. This year, Nina reached a quite different conclusion: The most serious problem encountered by taxpayers is...the Tax Code. The whole damn thing.

As the report says, "The most serious problem facing taxpayers--and the IRS--is the complexity of the Internal Revenue Code."

Olsen estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That equal to a year's labor by three million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258. Something is very wrong when we have to pay a vendor $258 just to perform the most basic of civic duties.

Not only is the Tax Code massive--3.8 million words by Olsen's count--but it is a constantly moving target. Her report estimates there have been more than 4,000 changes in the law over the past decade, and 579 last year alone. It is no wonder nobody understands it.

Andrew's headline asks "Why is Paying Taxes So Hard?"  I'd answer that it's because legislators so rarely think in terms of an overall budget for what they do.  I wrote about our political budget failures back in November:

Have you ever known anyone who got into trouble with credit cards? I don't mean someone who had something go wrong and ended up deep in credit card debt because they had to pay the rent somehow; I mean someone who wakes up one day with $21,000 in debt, a closet full of shoes, and no idea where the money went?

The way they get into that trouble is often that they don't budget. They consider each purchase in isolation: "can I afford these shoes? Can I make the payments on that television?" And in fact, they can afford each of their purchases. They just can't afford all of them.

A lot of what I see among the commentariat makes this mistake at the federal level. They offer a menu of tax and spending solutions for a given program--but they don't consider what that does to all the other programs. As I said in my previous post, I'm afraid that's what happened with PPACA; we accidentally "spent" the cuts, and the political capital, we needed to do deficit reduction.

Looking at each program in isolation is, unsurprisingly, a favorite trick of people in budget meetings when cuts are on the table--emphasizing the downside of the cuts, while protesting that the expenditure is but a small part of the organization's overall spending. Novice financial executives who fall for this soon realize their error: almost everything is but a small part of the organization's overall spending, and yet if you don't cut some of it, you will still end up in bankruptcy.

I was writing about taxes and spending, but we should also think about regulatory budgeting.  Complexity is the enemy of good regulation:  it makes regulations hard to enforce, and hard to comply with.  The more regulations you have, the less likely it is that you will be enforcing any of them well.  It also makes congressional oversight of the laws they've passed is nearly impossible--there are too many of them to know how well they're being executed, or how they're interacting with all the other laws that Congress has passed.

Is this an argument for no regulations?  Absolutely not.  It's an argument for prioritizing our regulations.  Food safety yes, regulations dictating exactly how much soup is in beef vegetable soup (as opposed to vegetable beef soup), not so much.  Not necessarily because there mighten't be some marginal improvement from the less important regulations (though in the case of the beef soup standards, I'm skeptical), but because in the context of the whole regulatory structure, regulations like this make our system too unwieldy.  Think about how you manage the stuff that comes into your house.  A few more scented candles might well be nice, and all by themselves, they are usually eminently affordable--but if you don't exercise some restraint over all these little purchases, your house (and your bank account) will be overrun.

All these tax deductions that make the tax code so complicated are often special cases of this sort of regulatory overaccumulation.  We will never have the fabled postcard tax return for people like me and Peter, because if you're going to tax people on business income, you're going to have to make some allowance for expenses.  But we could make things a lot simpler.  The problem is that legislators (and voters) don't think about building a stable overall tax code as a goal.  We get thousands of tiny little tax deductions, or special surtaxes, so that politicians can say that they've "done something" about the political problem of the hour. Some of these goals are even worthy . . . but collectively, the effect is monstrous.

We need politicians who think about these things the way a financially sound family thinks about their budget.  FIrst, they prioritize the absolute essentials: food, shelter, transportation, utilities.  Then they think about everything else in the context of building a sustainable overall budget--where the first priority is making sure that the whole budget balances, and works together.  No matter how nice things like music lessons or restaurant meals may be, they are subordinate to the need to keep spending sustainable.  

A politician's first goal, after bedrock basics like national defense and the rudiments of a social safety net, should be a manageable regulatory system, especially the tax code--one that is easier for citizens and businesses to comply with, regulators to administer, and for Congress to oversee.  We should not enact rules, no matter how nice, that significantly detract from that goal.  Most regulations would probably flunk that test--including causes dear to my heart like specifying what constitutes "free range chickens" or "nest eggs".

That doesn't mean that we wouldn't be able to do important things like regulating pollution, punishing fraud, or taking care of the weak and helpless.   In fact, we'd have more resources for agencies to spend on the most important core functions, if we didn't spend so much energy on peripheral issues.  Far from saying that we shouldn't do anything, I'm arguing that we just means that we shouldn't do everything.  And the truth is that we can't do everything--not well, anyway.