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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, November 2, 2009

Zelenak: Complex Tax Legislation in the Turbotax Era

Lawrence A. Zelenak (Duke) has posted Complex Tax Legislation in the Turbotax Era, 1 Colum. J. Tax L. ___ (2010), on SSRN.  Here is the abstract:

When tax returns were prepared with pencil and paper-in an era now gone forever-Congress did not impose income tax provisions of great computational complexity on large numbers of taxpayers, in the belief that it was unreasonable to require average taxpayers (or their paid preparers) to struggle with computationally complex provisions. As return preparation software gradually replaced the pencil in recent decades, the complexity constraint weakened and eventually disappeared. Congress has responded by imposing unprecedented computational complexity on large numbers of taxpayers, primarily through the expanded scope of the alternative minimum tax and the proliferation of phase outs of credits, deductions, and exclusions. This response would not be problematic, if the only objection to computational complexity were the difficulty of performing the calculations-a difficulty overcome by the widespread adoption of software. Unfortunately, computationally complex provisions generally constitute bad tax policy, even apart from computational concerns. For taxpayers faced with a welter of computationally complex provisions, the income tax is a black box, the inner workings of which are beyond their comprehension. This undermines both the political legitimacy of the tax system and the ability of taxpayers to engage in informed tax planning. In response to the demise of the complexity constraint, argues this Essay, Congress should develop a self-imposed constraint against the enactment (or survival) of computationally complex provisions of widespread applicability.

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I assist relatively low-income taxpayers and even they are unable to do informed planning regarding taxes. One person wanted to know how much she could take from her IRA without triggering an income tax (yes, she is otherwise in the 0% bracket). The tools that would be required to make this calculation are reasonably available only in tax prep software that won't be available until after the tax year ends.

A corollary to Congress' policy of greater complexity is late/retroactive tax law changes that both invalidate tax planning already performed and leads to putting off financial decisions due to uncertanty in future changes.

Consider the homebuyer who quickly bought a home in 2008 because of the $7,500 loan, only to discover that by waiting a bit would have gotten an $8,000 "gift" instead. Americans are learning from experiences such as this to wait and see, slowing down a recovery even more.

Posted by: J. Wiedwald | Nov 2, 2009 9:52:48 AM

"Congress should develop a self-imposed constraint...."

This is a joke, right? Right?

Posted by: ColoComment | Nov 2, 2009 10:39:36 AM