Calls for tax simplification make me smile. This was not always so. When I first began my career as a tax lawyer, I thought that simplified tax laws might reduce my income, or at least force me to work for very large organizations. But that did not happen. So now I am simply quietly amused when reading editorials demanding one form or another of tax simplification.

Since at least WWII, those intent on reforming the tax code have faced a dilemma: Any tax scheme that is simple will ultimately turn out to be unfair in many (perhaps even most) instances, and any tax scheme that is fair will always be mind numbingly complex. This is a direct result of the complexity of the economy. And the evidence to date suggests that, to the extent simplicity is achieved, it is fleeting. As businesses and people take advantage of newly enacted rules in ways not foreseen by less than omniscient legislators and bureaucrats, complexity creeps back into the law, the regulations promulgated under the law, and the court and IRS interpretations of both. And of course, this complexity creep ignores the wrinkles intentionally introduced into the tax code for the purpose of creating an incentive to behave in a certain way. The social and economic engineers will always be with us.

So I think that simplicity is a goal that cannot be reached in the context of a tax code. Fairness (at least universal fairness) is also unreachable. But, while simplicity is nice, fairness, or at least perceived overall fairness, is required in a tax code.

Our tax system is almost entirely voluntary. Each taxpayer is required to keep track of and report his income to the government, with various criminal and civil penalties available to the government to impose where a specific taxpayer fails to do so. But only a very small handful of the returns filed (something like 2%) are actually examined for anything more than errors in arithmetic. Since the odds of "audit roulette" clearly and massively favor the taxpayer, I think that it is fair to conclude that the level of tax compliance achieved in the US is largely voluntary on the part of the vast majority of taxpayers.

And that voluntary compliance is a valuable thing. It needs to be maintained. I do not envy the IRS its mission of extracting the federal budget (more or less) from the citizenry on an annual basis. But their job is a piece of cake compared to their counterparts elsewhere around the world. Tax evasion has been raised to the level of a national sport in some countries.

Change the tax laws in a way generally perceived to be unfair, and voluntary compliance will sink like a stone, to the detriment of all of us.

One of the recent tactics of the "simplifiers" has been to reduce the number of people subject to the income tax. This does indeed simplify the problem. But it does so by imposing a larger and larger portion of the burden of the income tax on a smaller and smaller portion of the population. Eventually, that will be perceived as unfair.

Another recent tactic has been to suggest the complete or partial replacement of the income tax with a value added tax. The VAT does nothing to reduce the complexity of the tax code. It merely hides that complexity from the general public by making it inapplicable to them. It is inapplicable not because they don't pay the VAT. They do. It is inapplicable because they cannot alter or appeal the amount of the VAT they pay. Eventually, that will also be perceived as unfair. In addition, the income tax has probably been the single most successful tax in history. I would think long and hard before replacing it.

The moral of the story: Beware of policy wonks bearing simplified tax codes.