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3 Things to Know for Tax Day

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Death and taxes. These are life's two inevitabilities, and sometimes they happen together. According to a study published in this week's Journal of the American Medical Association, deaths from traffic accidents are 6% higher on tax day (usually April 15) than on the same day one week before and after. "Stressful deadlines might increase the risk of road trauma by impairing drivers or by compromising surrounding individuals from making compensatory adjustments," the researchers wrote.

That's one thing to keep in mind before tax day next week. Assuming you make it through the day, here are three more.

1. Why it's so hard to simplify the tax code
Everyone who isn't a CPA wants a simpler tax code. Yet it becomes more cumbersome and loophole-ridden year after year. "The federal code plus IRS rulings is now 70,000 pages long. The code itself is 16,000 pages," CNN's Fareed Zakaria recently wrote. President Barack Obama's recent budget proposal criticizes the tax code's complexity, and in response suggests closing several loopholes -- but adds others at the same time.                                                

Why is it so hard to simplify the tax code?

There are several reasons, not the least of which is lobbying. As Reuters columnist David Cay Johnston wrote this week, Turbo Tax parent Intuit (Nasdaq: INTU  ) donated $1 million in support of a California candidate for state controller who opposed tax simplification in 2006.

But the biggest reason by far is that the rules complicating the tax code -- deductions, credits, and loopholes -- are incredibly popular with voters.

Tax deductions (technically called "tax expenditures," since they mimic a cash subsidy) will reduce tax revenue by $1.1 trillion in 2014, according to a recent study by the Congressional Research Service. There are dozens of special deductions, but just a few make up half the total cost:

Deduction

Cost in Lost Tax Revenue (2014)

Employer-provided health insurance $164 billion
Retirement savings $163 billion
Mortgage interest $100 billion
Medicare $76 billion
Capital gains rates $71 billion
Earned income credit $58 billion
Income taxes $54 billion

Source: Congressional Research Service (link opens PDF file).

Most polls show overwhelming support for simplifying the tax code, but support drops sharply when you get into specifics. According to a 2011 Gallup poll, 61% of respondents opposed getting rid of the mortgage-interest deductions; 62% opposed ending the deduction for state and local taxes. In one Bloomberg survey, more than half of respondents opposed even reducing the deductibility of employer-provided health insurance. There's a version of the NIMBY paradox when it comes to tax reform: People want a simpler, fairer tax code as long as it's not in my backyard -- or on their tax return.

Eliminating all tax deductions could, of course, fund a substantial cut in tax rates. But because of how deductions are distributed, such a proposal is unlikely to receive much support, either. Many benefit so handsomely from the tax code's complexity that their effective tax rates are rock-bottom. That brings us to the second point.  

2. Any way you measure it, federal tax revenue is historically low
Adjusted for inflation, federal tax revenue was the same in 2009 as it was 1997, even though the U.S. population grew by 37 million during that period.

As a percentage of gross domestic product, federal tax revenue is near the lowest it's been in more than half a century:

Source: Tax Policy Center.

A lot of this decline is simply due to the recession -- high unemployment means low income tax receipts. But that's not the only reason. The average federal tax rate for those with a positive liability was 11.06% in 2009 (the most recent year calculated), according to the Tax Foundation. That was the lowest since the group began collecting data in the 1980s, and more than a third lower than the average rate in the 1990s. "Nationally, average effective income tax rates were at their lowest levels since the IRS began tracking them in 1986," the group wrote. And overall rates will stay low at least through this year as the payroll tax cut saves most taxpayers 2% a year.

No one likes paying taxes. But as you file your returns this year, know that at almost any time in recent history you'd probably owe more on the same amount of income.

3. Many, many don't pay their fair share
In January, the IRS released a report on the estimated "tax gap," or money that people legally owe in taxes but evade paying.

For 2006 (the most recent year calculated), the gap stood at $450 billion, an increase from 2001's estimated tax gap of $345 billion.

This isn't money people legally avoid paying by using tax shelters like an IRA or 401(k). It's tax revenue illegally unpaid thanks to things like offshore bank accounts and unreported cash receipts from businesses.

The IRS only issues these reports every five years, and each report details just one year. But let's use some assumptions. Assume 2001's tax gap of $345 billion was reflective of the 2001-2005 period, and 2006's $450 billion gap was reflective of the 2006-2011 period. In total, that's $4.4 trillion in lost tax revenue over the last decade.

Happy tax day. And drive safe.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (14) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 12, 2012, at 8:45 PM, xetn wrote:

    Two areas benefit from tax complexity: accountants and attorneys. Neither want a reduction on tax complexity and both will lobby congress to make things even more complex.

    The best way to end tax complexity is to end the income tax altogether. After all, we went until 1913 without one and now would be a great time to end it.

    For one, it would be a boon to the economy and, second, it would severely limit the federal government's growth.

    Best of all, nobody know how to spend your money better than the individual and nobody should have the right to pretend otherwise.

  • Report this Comment On April 13, 2012, at 1:01 AM, jsssm wrote:

    #1 reason for all these tax loopholes and deductions is because our government loves to do 1 thing... social engineering. that is all it is. buy a house, don't drink or smoke, donate money to charity, get married, start a business, etc. all these 'incentives' and penalties are social engineering. i for one, am sick and tired of this.

  • Report this Comment On April 13, 2012, at 4:48 AM, JackCaps wrote:

    The U.S. government does not have a taxing problem, it has a spending problem. It was bad before BHO, but it got much worse with BHO. Just examine how much revenue would come from full implementation of"The Buffet Rule" for taxing high income earners, the revenues are so pathetic relative to the debt that the proposed policy had to be re-branded as a "fairness" policy rather than a deficit reduction policy.

  • Report this Comment On April 13, 2012, at 10:07 AM, TMFGortok wrote:

    A government limited by the US Constitution (not this 'living document' theory) does not need an income tax (and thus, would not need the IRS).

    For most of our nation's history, we have not had an income tax. We only 'need' one because the government is no longer restrained by the bounds of the Constitution.

  • Report this Comment On April 13, 2012, at 11:07 AM, BluegrassInNYC wrote:

    As anyone could have predicted, this post has brought out the usually teabaggers and wingnuts.

    Maybe you should all move to Mexico - it's a conservative dream: weak government; few regulations protecting the environment, wages, or labor; low or no taxes on the wealthy and corporations and a military to imprison anyone who dares to disagree.

    And as an added bonus, it is, with El Salvador, one of only two other countries with a constitutional provision for bearing arms.

    Don't imagine that I care about your responses. I'm sure I've given you plenty to rage about for the next several days.

  • Report this Comment On April 13, 2012, at 11:36 AM, Scotty0703 wrote:

    What do you guys think of this?

    http://www.fairtax.org/

    The idea is basically a national sales tax on all non-essential items, and the elimination of the IRS and income taxes for corporations and individuals.

    It would solve tax evasion (unless consumers just stop buying stuff), make saving easier for individuals, and supposedly generate the same amount of tax revenue. I gotta say, I like the idea on paper.

    Thoughts?

  • Report this Comment On April 13, 2012, at 1:00 PM, outoffocus wrote:

    "Everyone who isn't a CPA wants a simpler tax code."

    Thats certainly not true. I'm a CPA and I want a simpler tax code and I'm pretty sure I'm not the only one

    "But the biggest reason by far is that the rules complicating the tax code -- deductions, credits, and loopholes -- are incredibly popular with voters.."

    There's your proof right there. Its not us, its the voters and politicians. We're simply stuck cleaning up the mess afterwards.

  • Report this Comment On April 13, 2012, at 1:06 PM, outoffocus wrote:

    ***Newsflash to America: CPAs do not make their money solely from preparing taxes....***

    I'm just going to let you all marinate on that for a moment...

  • Report this Comment On April 13, 2012, at 3:45 PM, sthtxs wrote:

    I believe it is poor reporting to report any unpaid tax estimate given by the IRS. It is always wild guess. And it pales in comparison to the theft by federal government. The day before 9/11, Donald Rumsfeld reported that the Pentagon could not account for $2 Trillion. We need more 'tax' evaders and less suckers complying with the corrupt system.

    So Bluegrass, let me put to the test. Do you pay more taxes than you need to? If the answer is no, we already know you are a hypocrite.

    Given the FDA has approved and then recalled many drugs over the years that have killed people, how am I protected? And who can forget the approval 'pink slime'. Or the overuse of antibiotics in agriculture approved by the USDA and FDA. I wonder how many of the unnecessary regulations put the local producer out of business.

    The government failed miserably on 9/11 and we never got a real investigation as to what happened. Military bases are some of the most polluted places in America.

    I'm still waiting for the illegal overseas wars to end and have that money spent on infrastructure here instead rebuilding the places destroyed.

    And if you don't agree with the government, we are on way to prisons and military camps for the disagreeable among us. You might be one of them if there is any luck.

    Most of the taxes we pay are here to enslave us further. The 16th Amendment was never legally ratified but will never get a fair hearing by the masters running the court system.

    The fairtax is a joke. I don't see any need to keep the federal government in business as it is now.

  • Report this Comment On April 13, 2012, at 4:29 PM, DJDynamicNC wrote:

    "For most of our nation's history, we have not had an income tax. We only 'need' one because the government is no longer restrained by the bounds of the Constitution."

    That's a demonstrably false statement.

    You may think the notion of the Constitution as a living document is nonsense, but that's a particularly short-sighted belief - as the founders were well aware. Where do you think those first ten amednments came from?

    And then, just six perfectly Constitutional amendments later - income tax.

    Laws that are passed in this nation by Constitutionally elected representatives are then reviewed by Constitutionally appointed Supreme Court justices and either stricken or judged to be Constitutional, as per their Consitutional powers. That's how the system works and how it was designed to work. "Constitutional" is not a synonym for "stuff TMFGortok agrees with."

    There are laws that I believe should be challenged on Constitutional grounds which have not yet been so challenged - I suspect you'd quite agree with me on several of them - but the fact that they've not yet been challenged and may never be challenged is a failing of those whose duty it is to ensure that such challenges take place. As such, it is an eminently achievable and worthwhile task to address those failings.

  • Report this Comment On April 13, 2012, at 4:54 PM, TMFGortok wrote:

    @Scotty0703 The "Fair Tax" presumes that you could first get the Income Tax repealed.

    Should that glorious day ever arrive, do you really think people will say, "Yes, tax me, please!"?

  • Report this Comment On April 13, 2012, at 5:04 PM, TMFGortok wrote:

    @DJDynamicNC: Which part is demonstrably false? Not the first part (The Income tax has only been in existence since 1913).

    The Second? "The government is no longer restrained by the bounds of the constitution" is false?

    That's easily provable with just one example ( I can cite many, many more, but I only need one to prove my point). Prohibition required an amendment to the US Constitution to be legal. The amendment was passed (and later repealed). Alcohol became illegal.

    Now, I never saw an amendment being passed to outlaw drugs, yet they are illegal.

    How? By stretching the interstate commerce clause.

    With a living document, it can mean whatever you want it to mean -- thereby cancelling out its usefulness (as Thomas Jefferson put it) in restraining power by "bind[ing] him down from mischief by the chains of the Constitution."

    Keep in mind that "Judicial Review" is not a power that was granted to the judiciary by the Constitution. It was a power grab by the Judiciary in Marbury vs. Madison (1803).

    I've never said that the Income tax is unconstitutional (though I wish it were). It is constitutional because there is an amendment for it. I would like that amendment repealed. We do not need it if the government stays within its constitutional bounds. I have named just one way that the government has forsaken the Constitution. I could name dozens if not hundreds of other cases.

    There is a radical difference between the Amendment process and the idea of a living document. In fact, they are at odds.

    If you believe the Constitution is a living document, then no amendments are necessary -- drugs can be outlawed because Congress could simply stretch the intent of the interstate commerce clause. If you believe in the Amendment process (I do), then we have to pass an Amendment to grant the government the power to outlaw drugs. We have not done so.

  • Report this Comment On April 13, 2012, at 5:20 PM, DJDynamicNC wrote:

    ---> ""The government is no longer restrained by the bounds of the constitution" is false?<---

    Indeed. We already tried a weak federal government with the Articles of Confederation, and it didn't work. The Constitution represents a step towards a stronger central government, and as I'm sure you're aware even at the time the debate over the meaning and interpretation of the Constitution, and the extent to which it allowed the Federal government to impact day to day life, was fierce - as it remains today.

    I think again I need to highlight the difference between "unconstitutional" and "what I agree with." I think your point about the drug war is sound, and I'm certain that we'd find ourselves fighting on the same side of that battle if we were legislators. But the point you made is that the law was passed by "stretching" the interstate commerce clause. You're absolutely right - but I challenge you to show me how utilizing a clause from the Constitution is unconstitutional. Just because the interpretation that you would prefer is not the one that was chosen does not mean that the one that was chosen is unconstitutional (although you are free to argue that it is).

    In an ideal world, the amendment process would be the method by which the Federal government was restrained. In reality, the United States would fall apart if it were denied the ability to react to an ever-changing world as a unified whole. Now, maybe that would be better for the United States, and maybe not, but retaining that ability to function in a fast paced world has been essential to the survival of the United States as a national entity, and that was the entire purpose of the Constitution.

    We simply do not live in an ideal world, nor do we live in the 18th century world of horse messengers and months-long ocean crossings.

  • Report this Comment On April 14, 2012, at 1:34 AM, DJDynamicNC wrote:

    ---> "Keep in mind that "Judicial Review" is not a power that was granted to the judiciary by the Constitution. It was a power grab by the Judiciary in Marbury vs. Madison (1803)."<---

    Also, I'm going to go ahead and flat out dispute the accuracy of that statement. Hamilton outright argued that the Constitution required the Supreme Court to undertake judicial review in the Federalist papers, the point was brought up and accepted repeatedly in the Constitutional Convention, and the Anti-Federalists agreed that the Constitution gave the courts judicial review powers, they just didn't think it was a good thing. Nobody disputed that ability back then, and I think it's difficult to build a case otherwise today.

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Morgan Housel
TMFHousel

Economics and finance columnist for Fool.com. Analyst, Motley Fool One.

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