Why is the Code so Complex? This is kind of like asking about the meaning of life - hard to get a good answer, but everyone seems to have an opinion. Here are at least a few of the reasons that the Code is so complex - recognizing that the issue is exceedingly complicated.
Lobbying for Tax Breaks has become a Big Business. According to an article on Reuters on March 25, 2013, there are over 1,700 tax lobbyists registered in Washington. A December 2011 report from the Public Campaign (a self-styled non-partisan group) identified thirty major US corporations that paid more for Congressional lobbying then they did in federal income taxes from 2008 through 2010.
Tax Reform probably requires Campaign Finance Reform. Tax reform always means there will be winners and losers in any changes. It also becomes a great fund raising tool for politicians on both sides of the discussion. The Center for Responsive Politics calculated that the 2012 national elections cost at least $6.3 billion, with $2.6 billion spent on the Presidential election and $3.6 billion on Congressional elections. Money speaks and the winners get to determine the tax rules. When the winning party changes, the Tax Code almost always gets more complicated.
Tax Code Engineering. Washington has a continuing propensity to use the Tax Code to create "desirable" incentives for the American public. Members of Congress are constantly inserting special provisions in the Code to benefit their donors and local businesses. Whether you agree with the incentives or not, they inevitably add complexity to the Tax Code.
The Congressional Two-Step. As noted above, Congress will sometimes adopt a tax change that is illusionary, but which has great titles and lofty slogans, with little real impact.
Public Attitudes. While most of those paying federal and state income taxes would like to see their taxes reduced, there is another perspective that may continue some of the current complexity. In an April 2011 Gallup poll, 47% of Americans said that they believe "our government should ... redistribute wealth by heavy taxes on the rich."
Reform is Myopic. Particularly in recent years, new tax bills have tended to have little strategic or long term planning imbedded in the changes. Most have been focused on short term concerns, such as economic recovery or political posturing. As such, the rules do not generally make long term economic sense. For example, according to the Congressional Budget Office, ATRA will obtain $600 billion in new revenue (mainly from the highest income earners), while adding $3.971 trillion to the federal deficit in the next 10 years (i.e., $3.638 trillion in lost revenue and $332 billion in new spending).
Reform means Tax the Other Guy. For most people tax reform is about raising someone else's taxes while lowering their own taxes. Former Senator Huey Long understood this perspective: “Tax reform means Don't tax you, don't tax me. Tax that fellow behind the tree.” Revenue Drives the Process. Many of the complexities are added as Washington seeks to either retain certain budget goals or seeks to disguise the true economic impact of a tax change. For example, there are 19 tax benefits which are phased-out as taxpayers reach certain levels of income. Much of the decision making on setting the break points is determined by budget scoring, instead of consistency or simplicity.
Repeal of Aged Tax Provisions. There is rarely a standalone reason for repealing an out of date tax provision. As a result there remain numerous tax provisions that have not kept up with the legal, economic and business developments and serve as impediments to business and financial decisions. For example, the restrictions on S corporation ownership and the §1244 limits on ordinary losses for business failures make little sense in the current economy.