This post was originally published on Forbes Sep 21, 2015
The trope of the "70,000 page tax code" which has been embraced by some of the presidential candidates is really starting to aggravate me. So far I have noted Jeb Bush, Ben Carson and Carly Fiorina leading their tax discussions with that falsehood. And it is a falsehood. It is pretty clear that the source of the falsehood is a misinterpretation of a statement by the American subsidiary of a Dutch company called Wolters Kluwer about a set of books that it sells - the 25 volume CCH Standard Federal Tax Reporter. Why anybody would buy those books is beyond me, but that is another story.
What Is The "Tax Code"?
When professionals say "the Code" they are referring to Title 26 of the United States Code - the Internal Revenue Code. According to the Tax Foundation, you can get a copy from the Government Printing Office that runs 2,652 pages. That is consistent with what Andrew Grossman wrote in an article titled Is The Tax Code Really 70,ooo Pages Long?. He took a look at his paper copy which is sold by Thomson Reuters , a Canadian company, and estimated that about half of it was explanatory and historical material and came up with 2,600 pages as being the actual Code. I went through a similar exercise with a somewhat dated (2007) two volume copy put out by the Dutch company (Wolters Kluwer - remember) and came up with 2,500 pages.
For whatever it is worth, there are still professionals out there who use paper books quite a bit, but I have not used them much in decades. The Dutch company and the Canadian company compete pretty fiercely selling their electronic versions of the body of tax material, which is much, much longer than 70,000 pages. In a free country with a judicial system and a Freedom of Information Act, it can only keep getting longer.
Two quick examples. Somebody comes before the Tax Court and says that they don't believe wages are income. The Tax Court tells them that they are wrong - so wrong in fact that they are going to be sanctioned for making a stupid argument. People keep doing it anyway, which adds to the body of case law. Organizations that don't qualify for exempt status apply for it and are turned down. That adds to the body of private letter rulings, which thanks to the Freedom of Information Act are no longer entirely private. There is no way I can conceive of to prevent that body of material from continuing to grow.
The Tax Foundation explains why somebody might say that "the tax code" is 70,000 pages
Statutes, Regulations, and Caselaw: But, a lawyer who relies just on cases and regulations isn’t a very good lawyer, because most court decisions are made on the basis of previously decided cases. The respected legal publisher Commerce Clearing House (CCH) puts out such a compilation, the Standard Federal Tax Reporter of 70,000 pages, with notations after each statute containing relevant cases and other information. CCH itself considers this volume to be representative of “the tax code,” since an expert needs to know all 70,000 pages to understand the tax code in full.
So the 70,000 pages is a marketing ploy by the people who indirectly work for the Dutch company. It is a particular compilation of a much larger body of material that by its nature must continue to get larger. The President and Congress together cannot stop that body of material from growing unless they repeal the Freedom of Information Act and deny taxpayers access to the courts.
But Is 2,600 Pages Still Way Too Many?
This is a really hard to discussion to have intelligently because it actually requires people to look at the Internal Revenue Code. Fortunately there are plenty of links to it on-line. I find this one from the Legal Information Institute pretty handy and recommend it if you want to follow along. The first thing you will notice is that Title 26 is divided into eleven subtitles and that the income tax, along with the self-employment tax, is just one chapter in one of those subtitles - Subtitle A. My rough estimate, though is that it accounts for about half of the pages. Since when the candidates talk about our swollen Tax Code they are usually referring to the income tax and not things like the excise taxes on distilled spirits, wines and beer. that brings us below 2,000 pages.
The Code as it relates to income tax probably does not need to be 2,000 pages, but I doubt that, as Carly Fiorina suggests it could be three. There are several reasons for this. I'll discuss three - bells and whistles that too many people like, the inherent complexity of taxing income and gaming the system.
Bells And Whistles
You can find a lot of the bells and whistles in Part IV of Subchapter A - Credits Against Tax. You've got credits for the elderly and disabled, adoption expenses, child care, energy property and education among others. Then in Part III of Subchapter B, you have "Items Specifically Excluded From Gross Income". Among those items are certain death benefits, gifts and bequests, interest on state and local bonds, rental value of parsonages (one of my favorites) and gain from the sale of principle residences. Just to pick one that I find rather fascinating, despite never encountering it in practice is Section 112 - "Certain combat zone compensation of the Armed Forces".
It is really hard to think Section 112 as a special tax break, but it really is. Who would argue to eliminate it? The funny thing is that I think if you were zealous about cleaning up the Code that exclusion would go and you would simultaneously raise the bonus called "imminent danger pay", which at $225 per month seems awful chintzy. The problem is that whatever you raised it to wouldn't seem like enough and you would end up wanting to put the exclusion back, since it doesn't seem right to tax people on the money they get paid while putting their lives at risk to defend us.
I really think the candidates who think that there are too many pages should show us the ones they want to tear out and tell us how many are left when they are done.
The Inherent Complexity Of Taxing Income
I'd like to refer you back to the statement that "an expert needs to know all 70,000 pages to understand the tax code in full". I don't think there is anybody who tries to be expert in all areas of tax law and that is really OK. The office I worked in used to have that now 70,000 plus page collection back in the day when it was around 40,000 pages, but like most sensible people, I do my research electronically now. I prefer the Candian company's service, but the Dutch company has one too. I'm surprised that there are still people who would buy the books. It takes all kinds I guess. Nonetheless, the 70,000 pages are both more than anybody needs to concern themselves with and less than you need to be an expert, since you need to look at the full text of the original source documents that affect your area and also specialized treatises, which are also available electronically. The Canadian company has gotten the lock on some of the more prestigious treatises like McKee's Federal Taxation of Partnerships and Partners.
We're looking at the Code, though and why it can't be just three pages. For that you can take a quick look at Chapter 1, Subchapter L - Insurance Companies. Why can't insurance companies just figure out their income like everybody else? It's because they collect money today that they may or may not have to pay out a really long time in the future. That's not the only section like that.
There are sections that cover financial institutions and trusts and estate and pension funds and exempt organizations. There may be lobbying and special tax breaks buried in those sections, but they really are necessary to clarify who should be paying what and when.
Because We're All A Bunch Of Connivers
The other thing that bulks up the Tax Code is illustrated in Reilly's Third Law of Tax Planning - "Any clever idea that pops into your head probably has a corresponding rule that makes it not work". My favorite part of the Code Subchapter K - Partners and Partnerships could be a lot shorter if it were not for tax shelters. Parts of the Code are essentially an arms race between people coming up with clever ideas and Congress wanting to make sure it is clear that those ideas don't work. The section of that type that probably impacts the most regular people is Code Section 469 - Passive activity losses and credits limited. A three-page income tax code would have holes that you could drive fleets of trucks through.
What Would The Jeb Bush Plan Do To The Page Count?
The Jeb Bush tax plan is detailed enough to indicate where it is adding and subtracting. The following provisions should cut the page count - eliminating the AMT, eliminating the business interest deduction, eliminating the net investment income tax and some unspecified business credits. Then there is the estate and gift tax, which oddly enough doesn't seem to cut much more than 100 pages.
Full expensing seems like it would cut some pages, but I don't think we will see the benefit for a while - like maybe forty years, since we still have all the property currently placed in service and actually I think that there should probably be an election to depreciate equipment, since some taxpayers would probably prefer that income be a little smoother.
On the pages cut by eliminating the estate tax, there will be some giveback, because of carryover basis.
The itemized deduction changes, although they will mean a lot fewer itemizers won't make for less pages. The elimination of the state and local tax deduction would be offset by some sort of complicated formula to limit the benefit of the deduction based on adjusted gross income.
There is already a proposed revision to the Code to eliminate the "carried interest" break. It is longish for a Code section so we would pick up a few pages there. The proposal to allow the lower earner in a married couple to file a separate return strikes me as being on the complicated side. The payroll tax relief for seniors adds a bit, but probably not much.
Bottom line, it seems that Bush's plan will actually cut a few pages on net, although that is mainly due to entirely eliminating the estate tax and the AMT. Ironically you could probably get close to Bush's plan in a lot of regards by just repealing the Regular Tax and leaving the AMT.
At any rate I have to give him credit for consistency, since I would give him a real hard time if I thought his proposals added pages on net.
It Is A Stupid Metric
Calling the number of pages that the American subsidiary of a Dutch company uses to summarize the body of tax authority "our tax code" is a silly thing for Presidential candidates to do. What is even sillier is acting as if that is some sort of really important metric. I'm really looking forward to the Fiorina campaign releasing the three-page tax code that the candidate is proposing. The repeal of Reilly's Third Law will create a burst of creativity among tax practitioners such as the world has never seen.
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