3 Things to Know for Tax Day

Death and taxes. These are life's two inevitabilities, and sometimes they happen together. According to a study published in this week's Journal of the American Medical Association, deaths from traffic accidents are 6% higher on tax day (usually April 15) than on the same day one week before and after. "Stressful deadlines might increase the risk of road trauma by impairing drivers or by compromising surrounding individuals from making compensatory adjustments," the researchers wrote.

That's one thing to keep in mind before tax day next week. Assuming you make it through the day, here are three more.

1. Why it's so hard to simplify the tax code
Everyone who isn't a CPA wants a simpler tax code. Yet it becomes more cumbersome and loophole-ridden year after year. "The federal code plus IRS rulings is now 70,000 pages long. The code itself is 16,000 pages," CNN's Fareed Zakaria recently wrote. President Barack Obama's recent budget proposal criticizes the tax code's complexity, and in response suggests closing several loopholes -- but adds others at the same time.                                                

Why is it so hard to simplify the tax code?

There are several reasons, not the least of which is lobbying. As Reuters columnist David Cay Johnston wrote this week, Turbo Tax parent Intuit (NAS: INTU) donated $1 million in support of a California candidate for state controller who opposed tax simplification in 2006.

But the biggest reason by far is that the rules complicating the tax code -- deductions, credits, and loopholes -- are incredibly popular with voters.

Tax deductions (technically called "tax expenditures," since they mimic a cash subsidy) will reduce tax revenue by $1.1 trillion in 2014, according to a recent study by the Congressional Research Service. There are dozens of special deductions, but just a few make up half the total cost:


Cost in Lost Tax Revenue (2014)

Employer-provided health insurance$164 billion
Retirement savings$163 billion
Mortgage interest$100 billion
Medicare$76 billion
Capital gains rates$71 billion
Earned income credit$58 billion
Income taxes$54 billion

Source: Congressional Research Service (link opens PDF file).

Most polls show overwhelming support for simplifying the tax code, but support drops sharply when you get into specifics. According to a 2011 Gallup poll, 61% of respondents opposed getting rid of the mortgage-interest deductions; 62% opposed ending the deduction for state and local taxes. In one Bloomberg survey, more than half of respondents opposed even reducing the deductibility of employer-provided health insurance. There's a version of the NIMBY paradox when it comes to tax reform: People want a simpler, fairer tax code as long as it's not in my backyard -- or on their tax return.

Eliminating all tax deductions could, of course, fund a substantial cut in tax rates. But because of how deductions are distributed, such a proposal is unlikely to receive much support, either. Many benefit so handsomely from the tax code's complexity that their effective tax rates are rock-bottom. That brings us to the second point.  

2. Any way you measure it, federal tax revenue is historically low
Adjusted for inflation, federal tax revenue was the same in 2009 as it was 1997, even though the U.S. population grew by 37 million during that period.

As a percentage of gross domestic product, federal tax revenue is near the lowest it's been in more than half a century:

Source: Tax Policy Center.

A lot of this decline is simply due to the recession -- high unemployment means low income tax receipts. But that's not the only reason. The average federal tax rate for those with a positive liability was 11.06% in 2009 (the most recent year calculated), according to the Tax Foundation. That was the lowest since the group began collecting data in the 1980s, and more than a third lower than the average rate in the 1990s. "Nationally, average effective income tax rates were at their lowest levels since the IRS began tracking them in 1986," the group wrote. And overall rates will stay low at least through this year as the payroll tax cut saves most taxpayers 2% a year.

No one likes paying taxes. But as you file your returns this year, know that at almost any time in recent history you'd probably owe more on the same amount of income.

3. Many, many don't pay their fair share
In January, the IRS released a report on the estimated "tax gap," or money that people legally owe in taxes but evade paying.

For 2006 (the most recent year calculated), the gap stood at $450 billion, an increase from 2001's estimated tax gap of $345 billion.

This isn't money people legally avoid paying by using tax shelters like an IRA or 401(k). It's tax revenue illegally unpaid thanks to things like offshore bank accounts and unreported cash receipts from businesses.

The IRS only issues these reports every five years, and each report details just one year. But let's use some assumptions. Assume 2001's tax gap of $345 billion was reflective of the 2001-2005 period, and 2006's $450 billion gap was reflective of the 2006-2011 period. In total, that's $4.4 trillion in lost tax revenue over the last decade.

Happy tax day. And drive safe.

At the time this article was published Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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