Wall Street Journal Reporter, Tom Herman, just published his final article as a full time employee and writer for the Journal in the area of personal finance. His take on the US tax system is interesting, and likely more accurate than the opinion of many, as he’s been writing about it since his arrival at the Journal in 1968.

Herman recalls how embarrassed he felt as a college graduate in 1968 unable to complete his own tax return. Out of this embarrassment and frustration came one of his first ideas for a story; he hired 5 different tax professionals to do his taxes and got 5 different outcomes. While that made him feel better about his own competency, it did shed light on how bad our system of taxation is.

Since that time, according to Herman, our tax system has moved from being a mess to a nightmare. For example, the number of pages in the CCH Standard Federal Tax Reporter, which records tax law and related material, has increased in size from 26,300 pages in 1984 to 70,320 pages today. Today, more than 60% of tax returns are signed by tax professionals, up from 46% in the mid 1980’s.

In his final article, Herman quotes former IRS Commissioner, Charles Rossotti, “Our federal tax system is so shot through with deductions, credits, exclusions, loopholes and outright noncompliance that it fails in its essential job of raising revenues efficiently. The complexity and instability of the tax system also leads people to believe that the average person always gets stuck, while the big hitters find ways to avoid paying, regardless of the advertised tax rates.” (Source for all the above information, “The Wall Street Journal, April 15, 2009)

Obama is trying to battle that perception. He’s asking congress for more money for the IRS to step up enforcement (Source: Wall Street Journal, April 15, 2009). This will likely mean more audits, increased scrutiny of tax shelters and an estate tax exemption amount that’s constant.

Ultimately though, in spite of Obama’s best efforts and intentions, it’s going to be an uphill battle. The more complex our tax system, the more difficult enforcement becomes. IRS employees have difficulty understanding the nuances of the tax code and what tax planning strategies are proper and legal and which are not.

And, as long as creating and building tax shelters is a high paying activity, the activity will continue and will evolve, with many tax shelter designers staying one step ahead of the ever changing tax code. With each added layer of complexity, with each new revenue ruling and revenue procedure, comes the potential for the creation of a new, allowable tax shelter or tax planning strategy.

Change and complexity create opportunity for tax planning professionals. Increasing tax rates as Obama has proposed, increases the potential reward from using a tax shelter. Combine complexity with increased tax rates and you create an environment where tax shelters and tax cheats multiply – that’ unfortunately, is where we’re headed given current tax policy.

The real answer to the tax problem is a simple tax system, easily understood by the masses. Only then will the problem be solved.

I got this story from a friend of mine. Thought it was worth posting here.

Young Chuck moved to Texas and bought a donkey from a farmer for $100. The farmer agreed to deliver the donkey the next day.

The next day he drove up and said, ‘Sorry son, but I have some bad news, the donkey died.’

Chuck replied, ‘Well, then just give me my money back.

‘The farmer said, ‘Can’t do that. I went and spent it already.’

Chuck said, ‘OK, then, just bring me the dead donkey.’

The farmer asked, ‘What ya’ gonna’ do with him?’

Chuck said, ‘I’m going to raffle him off.’

The farmer said ‘You can’t raffle off a dead donkey!’

‘Chuck said, ‘Sure I can. Watch me. I just won’t tell anybody he’s dead.’

A month later, the farmer met up with Chuck and asked, ‘What happened with that dead donkey?’

Chuck said, ‘I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $998.’

The farmer said, ‘Didn’t anyone complain?’

Chuck said, ‘Just the guy who won, so I gave him back his two dollars.’

Chuck now works on Wall Street.

This paper outlines a plan for a VAT dedicated to paying for a new universal health insurance voucher combined with a vastly simplified and much flatter income tax. Top income tax rates could be cut to 25% or less and most taxpayers would not have to file returns. The health care voucher would offset the inherent regressivity of a VAT, since the voucher would be worth more than the VAT tax paid by most households. Moreover, with the VAT rate tied to health spending, the public would have a vested interest in reining in the growth of health care costs.