Fortune’s Sloan: Tax System Even More Incomprehensible After Fiscal Cliff Deal

Tuesday, 08 Jan 2013 08:20 AM

By Michael Kling

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Washington's last-minute compromise avoided the fiscal cliff and kept the Bush-era marginal tax rates for most taxpayers. But there's a problem with those tax rates, writes Allan Sloan, Fortune’s senior editor at large.

The marginal tax rate is supposed to drive taxpayer behavior, but many taxpayers are unable to determine their real tax rate, Sloan laments.

Good luck estimating your 2013 tax rate. Instead of simplifying the tax code, the recent settlement, he says, made an already incomprehensible tax system even more incomprehensible.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

For instance, Sloan says his tax rate, for income falling in the $250,000 to $450,000 bracket, should be 33 percent for earned income and 20 percent for long-term capital gains and qualified dividends. But that's not the case.

Because he and his wife have income with the phaseout bracket of the alternative minimum tax, his tax rate is actually 35 percent. The AMT also complicates and increases his tax rate for dividends and long-term capital gains.

Plus, the additional Medicare tax for higher incomes also conspires to increase complexity, as well as taxes, he writes, noting that he's not complaining about the amount of taxes he pays.

The good news, he adds, is that the legislation increases employment — for accountants.

Many other commentators agree the agreement did nothing to improve the tax code.

We have a "swollen beast of a tax code estimated at 6 million words," asserts an editorial in The Dallas Morning News. As interest groups lobby to create, expand and retain their deductions, loopholes are piled onto more loopholes to produce a bloated document that only tax attorneys can decipher.

A starting point for simplifying the tax code, the paper argues, would be to implement the recommendations of the Simpson-Bowles commission, which recommended cutting tax rates across the board, having a single corporate tax rate between 23 and 29 percent and eliminating special subsidies for different industries.

Editor's Note:
How You Lost $85,000 During the Last Decade. See the Numbers.

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