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By Root 900 0

of taxpayers, the government, like Visa, knows exactly how much the taxpayer owes. Wages are reported to the government by employers. Interest and dividend payments are reported by banks. For most Americans, that’s all there is to the annual tax ritual. So why not a system that sent the taxpayer a draft tax form that was already filled out? As with the Visa statement, the taxpayer would be free to challenge it. But for the vast majority of taxpayers, no change would ever be needed.

Not necessarily a postcard, but just as simple.

In 2005, following a plan sketched by Stanford Law professor Joe Bankman, California implemented an experimental system like this for taxpayers with just one employer and no complicated deductions. The reviews were raves. As one report put it: “Most of the taxpayers who voluntarily participated in a test run of the state’s Ready Return program said it alleviated anxiety, saved time and was something government ought to do routinely. More than 96% said they would participate again.”20

So the following year, the state taxing authorities decided to expand the experiment. But very quickly, they hit a wall. Strong legislative opposition was growing to oppose this effort at tax simplification.

Why? From whom? Well, not surprisingly, from those who benefit most from a world where taxes are complex: consumer tax software makers, who sell programs to consumers to make completing complex taxes easier.21 Leaders in the California legislature blocked a broad-based rollout of this immensely popular improvement in the efficiency of the California tax system because it would hurt the profits of businesses who sold software to make California’s existing and inefficient tax system more efficient.

Now, again, this is small potatoes. And it has nothing directly to do with Congress (though a similar program at the federal level has been stalled at the IRS for similar reasons). But it illustrates the discipline we need to adopt if we’re to understand why obvious problems don’t get fixed. Sometimes problems pay. When they pay enough, those who benefit will work to block their being fixed.

This lesson we’ve seen before. But the more invidious story about complex taxes is actually quite a bit different, and much more significant.

The taxes that most of us think about are quite general. Most pay the same sales tax. And while the rates for income taxes are different depending upon your income, the impression the system gives is that broad classes of taxpayers pay the same basic rates. The tax code, to the uninformed, is a set of rules. Rules are meant to apply generally.

In fact, our tax code is riddled with the most absurd exceptions. Special rates that apply to “all corporations incorporated on January 12, 1953, in Plymouth, Massachusetts, with a principal place of business in Plymouth, employing at least 300 employees as of 2006”—that is, a case where “all” means “one.” Special exceptions to depreciation rules, or to deduction limitations.

These exceptions are proposed and secured by lobbyists. Indeed, lobbyist firms specialize in providing the “service” of securing these special benefits. The firm Williams and Jensen, for example, advertises that it has “the primary mission of advancing the tax policy interests of clients” and claims to have a “results-oriented approach, proven by outcomes,” including “creating new tax code provisions to help finance a client’s project” by “securing special effective dates and exemptions when Congress adopts tax law changes.”22 A paper by Brian Richter and his colleagues demonstrates convincingly one clear example of such a special tax benefit that gave one (and only one) NASCAR facility accelerated tax depreciation for their racetrack. The company secured that benefit through about $400,000 in fees paid to the lobbyist firm.23 Richter’s paper then provides an incredible empirical analysis of lobbying disclosure data to show that “firms that lobby are able to accelerate their tax depreciation at faster rates than firms that do not lobby.”24

In light of this finding, it is not