You Call This Relief? I Don't

Tax breaks -- you've gotta love 'em, don't you? Washington sure thinks so. Our lawmakers keep promising us more of them, even if it means adding further confusion to our already monstrously complicated tax laws. Will nothing stop those people?

My favorite tax treat this year is President Bush's controversial proposal to eliminate the corporate dividend tax. Here's a real winner! It aims to redress the "wrong" of taxing corporate profits twice -- once when they're earned by the corporation and again when the stockholder gets them. And Congress is ready with the knife -- the same Congress that refuses to eliminate a far more common double tax: the income tax we pay on the portion of our wages that goes to pay Social Security taxes. Apparently stockholders are more aggrieved by double taxation than American workers are.

Congress isn't much daunted, though. Sure, the Senate's watered-down version of the dividend tax plan in the $350 billion tax cut it approved last Thursday is only a partial victory for Bush: The tax would be reduced for one year, eliminated for three years, then reinstated. But the bill will go to conference with the House, and odds are high we're going to end up with a significant cut in dividend taxes over the long haul, if they're not eliminated entirely.

At least this relief will generate a bonanza of jobs, though. No, it's not going to jump-start the economy. But I can promise that if it goes into effect, it will guarantee thousands of new jobs for accountants and auditors. Why? Because allocating profits among all of a corporation's stockholders, and notifying every stockholder of the portion of his dividend that is taxable or tax-exempt, will be nothing short of an accounting nightmare. Stockholders, be warned: After you get billed for the additional tax-preparation fees this legislation will spawn, you might wish Congress had adjourned for the summer.

But it won't. It's determined to stay and ram through more tax relief -- whether that's good for us or not. You've got to hand it to the GOP: Republicans have done a bang-up job of convincing Americans that their government in Washington doesn't know how to use their money wisely, and that the best thing it can do is to give the money back -- or not collect it in the first place. And most Democrats, seeing how this plays at the voting booth, have jumped right on the bandwagon, fighting tax cuts only at the margin. That's why the war in Congress is over how many hundreds of billions in tax cuts should be adopted -- not whether any tax cut at all makes sense.

Our lawmakers are fully united in one respect, though: Under no circumstances will they gather the political courage to fight the war to give Americans what they really deserve -- a reasonably simple, fair and economically sound income tax.

It is as though Congress suffers from what I call SARTS (Self-serving Avoidance of Reasonable Tax Simplification) syndrome. This is a highly contagious disease, and a damaging one. It gave us all sorts of nuggets in the massive package of tax goodies passed two years ago -- like the $3,000 deduction for education expenses. Sound good? Well, hold on. First, it was only made available from 2002 through 2005, whereupon it disappears. And second, if you want to determine whether you're eligible for this itty-bitty deduction, Congress -- the same Congress that couldn't care less if wealthy homeowners deduct the interest on mortgages of up to $1.1 million -- may require you to recalculate your income based on nine frighteningly complicated provisions in the code. That's right, nine. Welcome to sections 86, 135, 137, 219, 221, 469, 911, 931 and 933. Saddle up, America! Dressage is a piece of cake after this exercise.

Nutty rules like this one have left so many Americans dizzy that half of those polled in a recent survey said either that there had not been, or that they didn't know whether there had been, new tax legislation in 2001. How could they forget that $300/$600 rebate?!

Single people had better start paying attention. The lawmakers' obsession with eliminating the so-called marriage penalty -- could it be because married people tend to vote more often? -- is unaccompanied by any outrage over the singles' penalty -- the obligation of millions of single people to pay income taxes on an appallingly low level of income.

Whatever Congress ultimately decides on this year's tax package, by ignoring tax simplification and preserving the several hundred special relief provisions embedded in thousands of pages of tax laws, Washington guarantees that our tax liabilities frequently will depend on our ability to avoid taxes rather than on our ability to pay them. Consequently, people with equal ability to pay taxes will seldom pay equally; moreover, people with greater ability to pay will often pay less.

I'm not talking just about the rich. This is a story of low-, moderate- and middle-income households, too. Indeed, because so much commentary focuses on the disproportionate share of tax relief for the rich, the public has scant information to help it understand how the tax laws produce wildly inconsistent tax burdens for ordinary households. With about half our individual income -- a staggering $3 trillion -- legally protected from tax each year, the results could not be otherwise. A dazzling world of special exclusions, exemptions, deferrals, deductions and credits is accessible to many households through planning or sheer happenstance, and is inaccessible, or barely accessible, to other households. Yes, through the tax laws, Congress creates a society of winners and losers.

Consider the following two hypothetical households. First there's our single taxpayer. Let's call her Jennifer Adams. She's 33 and will earn $11,000 this year cleaning motel rooms. She takes the bus to work because she can't afford parking fees, rents an efficiency apartment for $400 a month, receives no work benefits beyond one week of vacation or sick leave (her choice), pays all her health insurance premiums and out-of-pocket health costs, and has no other income. Her modest earnings have prevented her from saving anything for retirement.

Then there's our married couple. I've named them Tom and Grace Chance. They're 31-year-old parents of 1-year-old twin girls. Tom will earn $66,000 this year as a full-time associate in a national accounting firm, plus $3,000 his employer will contribute to his 401(k) plan, to which Tom also will contribute $6,000 out of his salary. Grace will earn $11,000 as a part-time secretary.

It is Tom's good fortune that his employer also has a "cafeteria plan," which offers a rich menu of opportunities for him to avoid taxes on the portion of his wages his employer uses to pay many of his personal expenses. This year, Tom's menu -- totaling $16,000 -- will cover premiums for a family health insurance policy and a disability-income policy; out-of-pocket family medical expenses and parking expenses at work; and $5,250 (the maximum allowed under the rules) for college courses he is taking in late 19th-century expressionist art.

Tom and Grace own their four-bedroom house. They have mortgage interest, property taxes and state income taxes to pay. They also make small charitable contributions. These expenses will total $18,800 this year.

Okay, public. What do you think? Should Jennifer pay an income tax? Should the Chances? If only one should pay, which one?

I hope you're sitting down. The answer is: Congress believes only Jennifer should pay. Congress figures it's fair to tax her on her income above $7,800 (Fig. 1, above), even though the federal poverty level for people like her is $9,400. The Chances will be required to pay nothing (Fig. 2, below) -- zero -- even though their $80,000 earnings are more than 430 percent of the federal poverty level ($18,400) for a family of four. In computing the Chances' taxes, I have assumed that Congress, as proposed by both houses, will increase the child credit this year from $600 per child to $1,000, and will increase from $12,000 to $14,000 the amount of their income subject to taxation at the marginal rate of 10 percent. Otherwise, the Chances would have to pay $900 in taxes, a burden Congress appears to believe they should be spared.

I imagine you're standing on your kitchen table screaming "Has Congress lost its mind?!" To be fair, though, I believe that very few members of Congress would guess that the Chances would pay nothing. The law abounds with so many incongruities, contradictions and absurdities that it defies reasonable predictions of who will end up paying what.

Take the 10 education subsidies Congress has randomly crafted. They provide solid evidence of why Americans should insist that legislators curtail their efforts to engage in social and economic engineering through the tax laws. Rather than maximize the likelihood that people who can't afford college will be able to attend, most of the subsidies help people who would be likely to go to college even without the relief. For example, the largest subsidies, which can involve tens of thousands of dollars in tax savings, apply to wealthy parents or grandparents who stash $100,000 or more in tax-exempt state and private college plans to pay for their children's or grandchildren's college tuitions; when the tution is paid, the payments are also tax-exempt. Middle-class families rarely can set aside such large amounts. Low-income families can't afford to set aside any amount.

A Hope Scholarship credit ($1,500) and the Lifetime Learning credit ($2,000), which President Clinton championed to help ordinary Americans attend college, can help lower-income people who owe taxes. But for all those households who can't afford to send a child to college and don't owe taxes, the credits are worthless.

And then the final whammy. Economics 101 teaches that government subsidies increase the price of the thing subsidized, in this case higher education. People at the bottom of the income pole thereby get hit twice: They don't get the subsidies, and their education costs are higher than they would be if the subsidies didn't exist. The cost effect, of course, applies to everyone, which should make us wonder if any of the education subsidies, except those based on need, deserve to be in the laws in the first place.

And so it goes. Tax subsidies for health insurance, housing, retirement and most other things tend to benefit most those who need the subsidies least, and to benefit least those who need the subsidies most, while the subsidies themselves drive up prices.

If Congress were to vastly simplify the tax laws by providing relief only in the most compelling cases, it could bring down tax rates for everyone without sacrificing tax revenues. And if lawmakers stopped trying to micromanage our behavior through the tax laws and reduced taxes across the board, our economy would be stronger. So would the cash-strapped IRS, which recently announced that it lacks the money to collect $13 billion owed by taxpayers who could and would pay, if the IRS insisted.

But suffering as it is from SARTS, Congress will not engage in the tax war Americans deserve without strong pressure from voters. A worthy first step might be to ask candidates to explain why a struggling single person like Jennifer Adams should pay an income tax, while fairly comfortable marrieds-with-children like the Chances should not. I don't know why. Do you?

As Clear as Mud:
According to polls, Americans are less and less trusting of government, and sometimes there's good reason. Here's Outlook's own tax poll. Take a look at the following examples of some of the absurdities that grace our federal tax code, and rate them on a scale of 0-10, with 0-3 being "crazy," 4-7 being "I can live with that" and 8-10 "what a brilliant idea." Then add up your score: 72 or higher means "I'd Give Them the Clothes off My Back"; 45-71 means "Well, Maybe Just My Shirt"; 27-44, "I Wouldn't Let Those Guys Baby-sit My Kids," and 0-26 "When's the Next Election?":

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