IT’S A GRAY AREA:

One of the best ways we could reduce the complexity of life, generally increase fairness in our society, and save virtually everybody an appreciable amount of money would be to scrap our nation’s income tax code and move to a different tax system. In fact, our present income tax system simply cries out for change!

Each year, Americans spend about $200 billion just to keep records and fill out the paperwork for their income tax returns.

And along the way, they also spend about 5.8 billion hours keeping tax records and helping to prepare their tax forms. This is enough to keep the equivalent of 2.7 million people doing nothing but tax-related paperwork all year long.

To bring some additional perspective to the issue: Average business owners each spend more than 100 hours every year in this same activity.

If that burden were to be lifted, each business owner could take a full two-week vacation from work with the time that would be saved. And the situation is worse for larger businesses, because most of them actually have a tax agent physically stationed in their offices every working day.

Today the federal tax code is comprised of about 5 million words, and they fill 3,387 published pages. And the code is so complicated that 56% of Americans pay someone else to prepare their taxes.

But that does not always help because many tax issues are so complicated even tax experts working on identical problems routinely arrive at different results.

As a personal example, I believe I am perhaps modestly intelligent, and I work for the government and simply receive a W-2 form at the end of each year, although I do have some investments.

But I feel lost in attempting to prepare my own tax forms, and I have paid an accountant to do so for years. You are probably in the same position.

At the other end of the process, the costs for the Internal Revenue Service in 2007 for administration, record keeping, tax filing, advice, collections and enforcement was about $194 billion. To put this into perspective — this was about the same amount of money as the entire federal budget in the year 1970!

And none of this is productive work, or, as economists say, this work does not produce wealth. Instead it is a complete drain on our resources. Wouldn’t it be helpful if we had a better, less complicated and less expensive system?

Well, we do. We could easily make our system more straightforward and fair by utilizing a “Flat Tax,” or a variation of it which is known as the “Fair Tax.”

Both of these approaches would severely reduce the complexity of the system as well as the involvement of the IRS. A second option would be to phase in a national sales tax, which would have the benefit of abolishing the IRS completely!

In addition, if either of these options were used effectively, we should also be able to abolish the alternative minimum tax and also the “death tax,” which taxes families on the savings they have accumulated after paying income taxes for years.

So both of these changes would have an enormously beneficial change upon us individually, as well as upon our nation’s economy as a whole.

Just think of it: Each of us would save all of the time, expense and frustration of the record keeping and other costs associated with the present system.

So even if we ended up paying the same amount of taxes, which when it came down to it we probably would, all of the accounting and preparation expenses would be saved, and our lives would also be much less complicated and fair. In addition, the government would save most of the $194 billion yearly costs of the IRS.

Under our present system, the issues regarding taxes make such a huge financial difference to some taxpayers, that they frequently pay a tax specialist $50,000 so they can save $150,000 in taxes. For the taxpayer that makes perfect economic sense. But for the nation at large, it is truly wasteful.

And, along the way, the financial reward to the specialist is so substantial that now some of the brightest minds in our country work on nothing but tax issues. Wouldn’t it be more productive for our country as a whole for these intelligent minds to be addressing issues of free enterprise?

Of course if we follow our present course to its ultimate conclusion we may end up changing our tax return form to only two short items: 1) How much did you earn last year? 2) Send it in (and congratulations, you even get to pay the postage!).

So who is happy with the status quo? Basically, there are two influential groups that are profiting from our present system. The first is tax accountants, tax attorneys and tax preparation companies like H&R; Block. They are making a good living under our present system and certainly do not want to change it.

But the second group, which is by far the most adamant, is composed of the members of Congress. Providing special legislative tax breaks to their wealthy constituents brings these politicians major contributions for their reelection campaigns. And this is a powerful stimulus to combat and thwart any change. In fact, that is the only major reason why the call for income tax reform has not been heard consistently all across the land. In other words, taxation with representation isn’t all that wonderful either!

Those of you who would like to investigate some options to our present tax policy are invited to join us in this column next week. At that time we will more fully explore both the flat tax and the national sales tax. So stay tuned.

JAMES P. GRAY is a judge of the Orange County Superior Court, the author of Wearing the Robe – the Art and Responsibilities of Judging in Today’s Courts (Square One Press, 2008), and can be contacted at [email protected] or at his blog at JudgeJimGray.JudgeJimGray.com.