Feb. 28, 2006

Robinson Helps Explain “Fog of Complexity” in U.S. Tax Policy

By Chantelle Wallace

Tax law can seem like a “fog of complexity,” said Accounting Professor John Robinson at the Feb. 20 Faculty Research Presentation Speaker Series. Robinson tried to mitigate that complexity by explaining the institutional issues and incentives involved in federal tax laws. He also explained recent efforts to simplify tax law and offered predictions about future developments.

Video: Watch Prof. Robinson explain how our tax policy got complicated.  (wmv)

Cause of Complexity

Sources of tax law complication are partially a function of the incentive structure of our legal system, Robinson said. These incentives stem from the three branches of government—the legislative branch which passes laws, the executive branch which implements laws and the judicial branch which  interprets laws.

Legislators are motivated to pass laws based upon short-term goals, such as reelection, and long-term goals, such as religious beliefs or other personal convictions. In order to be reelected, legislators must please their constituents who typically detest tax hikes. “Your job as a legislator is to pluck the goose with the least amount of honking,” Robinson said referring to the inevitable uproar that accompanies tax increases.

Taxes are necessary for public goods, yet few people want to pay them. “It’s very difficult to come up with a tax that generates enough revenue,” Robinson said. “We have met the enemy and it’s us—we demand the government provide us with so many benefits, yet we don’t want to pay for them.”

The situation is further complicated by legislators’ vested interest in maintaining tax perks that benefit them, even though perk-reduction would cut down on the law’s complexity.

The executive branch of the Internal Revenue Service issues regulations. The more ambiguous and confusing they make tax laws, the less controversial these laws are because few people understand them well enough to complain, said Robinson. This provides yet another layer of complexity added to tax law.

Judges are bound by precedent because they don’t want their rulings to be overturned. This means they typically adhere to previous court decisions rather than clarifying the law with a fresh answer. When laws are lucid, tax payers rush to take advantage of them. Poorly defined laws deter risk-averse people, which is an incentive to keep them ambiguous.

Tax Law Justice

According to Robinson, framing tax laws in such a way as to make them appear fair to different socioeconomic constituent is essential, yet difficult. In the 1970s the income tax was voted the fairest tax, yet in the 1980s and 1990s sentiment turned against it. The belief that wealthy citizens should pay higher taxes now pervades America, yet practice proves this is often untrue.

Despite the advent of online tax tools, such as TurboTax, the convolution of the system remains. “Automation offers a lot of options, but isn’t a solution to systemic complexity,” Robinson said. “The key to reducing your taxes is to buy a house.”

 

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