One of my main responsibilities as the national taxpayer advocate is to report to Congress each year on the most serious problems encountered by taxpayers.
The hands-down "winner"? The confounding complexity of the tax law itself. With a tax code that my office estimates has grown to nearly 4 million words, complexity lurks everywhere.
For older people, the rules regarding required minimum distributions from retirement plans, how much (if any) of your Social Security benefits are taxable, and your eligibility for the tax credit for elderly and disabled taxpayers are among the more vexing challenges. It is not surprising that nearly 60 percent of taxpayers hire preparers to complete their returns and another 30 percent use commercial software.
Since I was appointed in 2001, I have been urging Congress to vastly simplify the tax code. This was last done in 1986, when Congress pared back many tax breaks that created complexity and, in exchange, reduced tax rates substantially. The change was revenue-neutral — meaning the reduction in tax rates offset the loss of tax breaks, so the average taxpayer's annual tax bill remained about the same.
Most experts and taxpayers view the 1986 act as a major success. So why won't Congress use that model to simplify the code again?
Here's my guess. Partly because the code is so complex, many taxpayers think Congress can close lots of "loopholes" that affect only "special interests." While it's true that some tax breaks benefit narrow industries, the reality is that the special interests are us.
By far the largest tax breaks (by dollar value) are designed for the broader population — the exclusion of employer contributions for medical insurance premiums and medical care; the exclusion for retirement plan contributions and earnings; the mortgage interest deduction; the reduced tax rates on long-term capital gains; and the deduction for state and local taxes.
If we want comprehensive tax simplification, the American public must be willing to give up or accept reductions in some popular breaks in exchange for a simpler code (and, if done on a revenue-neutral basis, in exchange for lower rates). If many taxpayers continue to believe cutting someone else's loophole will get us there, tax reform will not happen.
It is essential for taxpayers to engage in a substantive dialogue about the required trade-offs between tax rates and tax breaks. An uninformed taxpayer who hears he may lose a tax break will instinctively want to keep it to prevent his tax bill from rising. An informed taxpayer who understands that in exchange for giving up tax breaks we can achieve significant tax simplification, plus lower taxes, will have a very different reaction.
I am encouraged to see increasing bipartisan interest in pursuing tax reform in Congress. Whether Congress ultimately enacts tax reform depends on the engagement and support of all of us.
Nina E. Olson heads the IRS's Taxpayer Advocate Service.