A Nation of Tax Scofflaws?

 by Vernon K. Jacobs

Scofflaw - A person who flouts a law,
especially an unsustainable one.

The term scofflaw originated during the prohibition era as a way to describe those who ignored the law. Although prohibition was eventually repealed because it was both unenforceable and was the direct cause of the criminal element that ignored it, the term has continued to be used to describe individuals who ignore various laws because they are perceived as being either ridiculous or unintelligible. Many people are scofflaws with respect to parking tickets or even to tickets for moving violations. Clearly, those who want to use various prohibited drugs are ignoring the law and the purveyors of those drugs are the direct cause of a great deal of violent crime in the USA and other countries.

But it seems to me that the U.S. tax law is on its way to extinction because it is a law at which more and more citizens are scoffing (to jeer or laugh at with contempt) at the preposterous minutia of our tax laws and in particular, our income tax laws.

The harder the government tries to prohibit tax evasion and the more they try to enforce mindless attempts to govern behavior through the tax laws, the more the income tax law will be perceived as ridiculous and unenforceable. The U.S. tax law has already reached the point where it is impossible for any citizen to be fully compliant. At first a few people scoff at the law and defy the government to enforce the law. But there is only a small fraction of IRS agents available to do that. Therefore, more and more people boldly engage in tax evasion knowing that it offers a higher reward and much better odds than any game in Las Vegas.

More and more people are beginning to ask, “Why can so and so get away with that without getting caught?” And more and more of those people begin to first bend the law with exaggerated deductions and eventually to simply quit paying taxes altogether.

Before the 1970s, our tax laws were not changed with any rapidity. Proposed changes were discussed and deliberated for years with opportunities for all kinds of interest groups or citizens to explain how a proposed change would be beneficial or detrimental. The law imposed a very high (70%) maximum tax rate, but it included a great many tax breaks or loopholes that affluent individuals and businesses could use to reduce their tax burden. Now, changes in the tax laws consume hundreds of pages of fine print every year. Changes are phased in and out over periods of up to ten years. Although indexing for inflation is generally beneficial to taxpayers, it adds an enormous element of complexity to the law. Tax professionals and even many taxpayers were able to memorize the essential components of computing the income tax. Now, it’s necessary to check a reference book to see what the deductions and exemptions are.

A recent graphic in USA Today showed a comparison of the King James Bible and the U.S. Internal Revenue Code. The tax code was about twenty times larger. When it started, the Ernst & Young annual tax preparation guide was about 200 pages. Now it’s almost 700 pages long.  According to John Walker,

The Internal Revenue Code is arguably the most ambitious social engineering project ever attempted in human history, and without doubt one of the most counterproductive. History will regard it as a Great Pyramid scale monument to unintended consequences. Every provision added with the intent of creating an incentive to stimulate some desired activity results in both attempts to use it purely to escape taxation, and/or creates other unanticipated and possibly deleterious "industries" economically justified only by the tax incentive. This, in turn, causes additional provisions to be enacted, ad infinitum or asymptotically close. Here are some statistics for the 2004 edition of the Code. 

In spite of the preposterous size and complexity of the tax code, every citizen is expected to be sufficiently aware of the contents to be able to comply with the tax law. But it is an impossible feat even for those whose job involves studying the tax law. People who attempt to help taxpayers to be in compliance have been forced to specialize in one of the dozens of distinctly different parts of the tax law because it is simply beyond the capacity of any person to keep up with the annual avalanche of changes.

But the actual tax law itself is just the tip of the regulatory iceberg. The IRS Regulations take up 13 inches of shelf space and are about four to five times as large as the tax code. Every week there are dozens if not hundreds of public and private letter rulings and court cases that deal with diverse tax issues. The complexity of the law has also forced the IRS to divide their personnel into specialized groups dealing with different parts of the tax law. The result is that sections of the law that interact with each other are increasingly full of contradictory rules.

And then there is a mountain of books and magazines that attempt to compile and summarize all of this for the tax professionals. For the tax professionals, it is certainly not any worse than what doctors have to absorb in terms of new research in various medical specialties. But the taxpayer is presumed to be able to comply with the tax law and not required to use the services of a professional.

Every week I get calls from people who want me to confirm that some tax saving arrangement is legal and in most cases it is not. There are a lot of myths, mis-information and non-sense on the Internet and in many financial publications. Studies by the Government Accounting Office indicate that on average, bad advice is given to half the taxpayers who call the IRS for help.

When any law reaches the point where a full time professional has to specialize in a small segment of the law in order to keep up with the changes, the average taxpayer simply can't cope with such a law.  Not being able to cope will lead more taxpayers to simply scoff at the preposterous minutia and to ignore it most of the time. 

Like the proverbial house of cards, our income tax system is on a collision course with a great increase in non-compliance.