Tax System in the United States

External Factors that Affect the Tax System

• Legal Complexity: The legal environment creates certain complexities outside the control of the tax system. For example, the law regarding partnerships affects the allocation of partnership debt to individual partners, community property laws necessitate rate schedule changes to achieve parity among the states, and legal rights of ownership affect the transfer tax statutes.
• Transactional Complexity and Business Dynamics: Some transactions are inherently complex. In many cases, the complexity of the transaction will necessitate complexities in the governing statute and regulations. Similarly, technological changes in the communication of business transactions in the global marketplace, as well as the proliferation of new financial instruments and transactions, result in additional complexity as new laws, rules, and regulations are promulgated to cope with the changes.
• Diffusion of Responsibility: Because responsibility for the problems and costs of complexity is not specifically assigned within Congressional staffs, the Treasury Department, or the IRS, there is no accountability for these effects. Thus, there is no strong incentive for anyone involved in the legislative or administrative process to tackle the problem as a priority. A focused responsibility for simplification should be mandated.
• Inconsistent Application of Rules: The multiple jurisdictions and levels of the courts lead to uncertainty because of different applications and interpretations of rules. The fact that state and local tax rules may dramatically differ from the federal rules increases complexity exponentially.
• The Legislative Process (see below)

The Legislative Process

Complexity often is compounded by imperfections in the legislative process that make adequate deliberation impossible. The process must allow sufficient time to evaluate how well a proposal meets the goal of simplification in conjunction with its other merits. Full public hearings and debate on changes or new provisions provide an opportunity for Congress to learn of the potential administrative, compliance, and policy concerns of taxpayers. With public exposure, Congress has a better opportunity to craft legislation that will stand the test of time and not need frequent amendment to address technical problems. Hearings also give the public a better understanding of the provision and its purpose, and they increase the overall perception of fairness in the tax system.

It is possible to enact a simpler tax code. However, as history has shown, the difficulty arises in keeping it simple when faced with the constant need to raise revenues, and pressures to use the tax law to implement social and economic policy.

While the judiciary is the focal point for settling controversies between the IRS and taxpayers, Congress plays an important role as well. In cases where factual differences preclude establishing broad principles and rules, Congress must consider the efficacy of establishing objective rules to eliminate the controversies. A recent example was the debate on the amortization of intangibles, which was resolved prospectively with enactment of IRC section 197. While establishing a fixed amortization period of 15 years creates inequities in individual situations, the resulting certainty has in most cases made the law much easier to comply with and administer.

In many situations, Congress will similarly need to weigh competing consequences in making the final decision.