Talk about money: Tax code needs an overhaul

Some Republican presidential candidates say we should throw out our tax code and replace it with a much simpler system. But as one local accountant says, “Don’t hold your breath.”
Among the ideas that have been floated are Herman Cain’s 9-9-9 plan that would impose a 9 percent national sales tax, Rick Perry’s 20 percent flat tax and Ron Paul’s plan to eliminate the income tax altogether.
Simplifying tax law is an appealing idea when you consider that Americans spend an average of 19 hours a year preparing their tax returns, according to the National Taxpayers Union.
But politics and math are likely to get in the way of any meaningful tax reform, says Conrad Seales, a certified public accountant with Meisser & Seales in Santa Cruz.
“Washington seems to be able to only pass laws where everyone is perceived to be a winner,” he said. “But the math doesn’t work on ‘everyone wins’ tax change unless we borrow more,” driving the U.S. deeper into debt.
“I would be happy to see a tax reform that eliminated itemized deductions, meanwhile reducing tax rates overall,” Seales added. “But some families would win and some would lose.”
Frank Minuti, a certified public accountant with Berger Lewis in Santa Cruz, agrees that the tax code needs to be simplified.
“People should be able to do basic tax returns on their own without professional help,” he said. “But even taxpayers who use tax-preparation software like TurboTax will often click the wrong box, then get a bill from the IRS or the state saying they owe more than they calculated. The tax code is just too complicated for non-professionals.”
And some professionals also think it’s unfair. Take, for example, the mortgage deduction. A high-paid executive can write off the interest on a mortgage of as much as $1 million. So, in effect, the guy who mows the executive’s lawn and earns just enough income to pay taxes is subsidizing the executive to borrow $1 million to buy a mansion.
Seales also questions the fairness of the mortgage deduction.
“You could have two otherwise identical families, one which owns a home with a mortgage, the other rents a home,” he said. “The renting family could have sharply higher tax bills, even though they make no more money than the mortgaged family.”
But the mortgage interest deduction is popular, so whoever wins the presidential election next year would probably encounter fierce opposition to any plan to cut it.
It seems that we’re stuck with our overly complicated tax code, and Americans will continue to spend a lot of time on tax planning.
December is an important month for doing that. Some retirement plans for businesses require that paperwork be signed by the year’s end to qualify for a 2011 deduction.
And this month is the last chance to take losses on investments that haven’t worked out, which can provide valuable write-offs for 2011.
Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or [email protected].