Straight Edge Finance: Gridlock, Budget Scoring and the Hidden Costs of Complexity

A week or so back I ran into a woman I know who’s a very thoughtful, diligent Medicare specialist: her sole job is to help people pick out Medicare plans. “How’s it going?” I innocently asked. She gazed back at me with the grim ennui of one who’s seen attack ships on fire off the shoulder of Orion and told me she’d spent all day working through a preliminary seventy-page prospectus of a plan offering from United Healthcare for the fast-approaching open enrollment season. “Preliminary, mind you, they haven’t released the final one yet.” This was just one plan offering. She gets paid a few hundred bucks to advise her silver-haired clients on some plans. On others, she can’t get compensated at all, though she’s duty-bound to do the right thing by her clients.

She further explained that the complexity of her job derives directly from changes ushered in by Biden’s Inflation Reduction Act and Trump’s OBBBA. As she was telling me about this, I was reminded of the predicament that I and anyone else who thinks about how US taxpayers have found ourselves in of late. Already in 1965, when John Brooks published his magisterial “The Federal Income Tax” in The New Yorker (now available as a chapter in Business Adventures), the Federal Tax Code exceeded 1,000 pages in length, with 17,000 pages of regulations elaborating it. Since then things have gotten dramatically more complex, measuring 6,871 pages with about 75,000 pages of elaborations. One of the noble goals of Trump’s original tax law of 2017, the Tax Cuts and Jobs Act (henceforth “TCJA”) was to simplify the IRS Tax Code (“the Code”), and the TCJA took baby steps in that direction, most notably in the combining of the personal exemption and the standard deduction, a distinction most never understood anyway.

Since then, however, a number of pieces of legislation that have changed the Code and specifically its provisions for retirement planning. The SECURE Acts 1 and 2.0, the grossly-misnamed Inflation Reduction Act, and most recently the sophomorishly-named OBBBA (One Big Beautiful Bill Act), things have just kept changing, in often mind-bending ways.

For example, a provision of the 2022 Secure Act 2.0 states that, starting in 2026, those earning over $145,000 and who are over 50 years old will have to make all catch up contributions to 401ks on a Roth or after-tax basis. Before they were all made on a pre-tax basis. Why’s that? You might well ask. Because legislators need to limit the budget impact of bills so as not to further expand the already-massive Federal budget deficit. In fact, most of the large laws passed above, the TCJA, Inflation Reduction Act, and OBBBA were passed through reconciliation, which allows legislation to pass by simple majority and bypass the 60-vote threshold needed to avoid the filibuster. Reconciliation requires that bills be “scored” by the Congressional Budget Office as fiscally neutral, or non-deficit expanding, as of ten years after the law’s enactment.

And so, because Congress is hopelessly gridlocked and bipartisan legislation the purest oxymoron, we end up with taxes endlessly contorted by the need for putative budget neutrality to jimmy bills over the legislative transom of reconciliation. Since the ground shifts under our feet constantly, consumers come to depend more and more on accountants, financial planners, and even more granular sherpas like my friend the Medicare specialist. All of which costs regular Americans time, money, confusion and heartache.

It also creates crazy situations. For instance, given the high and growing level of the federal deficit, everyone I know working in and around taxes advocates contributing to retirement plans and IRAs on a Roth rather than pre-tax basis for everybody except those in the very highest tax brackets. The logic is that one should always try to pay taxes when taxes are lower. Right now taxes are low and most assume they must rise in the future to raise more funds to service the deficit. So most people should pay taxes now rather than in the future.

But one ballyhooed provision of the OBBBA is that it allows businesses to expense equipment or software purchases at the time of purchase rather than depreciating them over their lifetime. That’s an attractive proposition for many businesses, because it allows them to reduce their income in the current year and pay less in taxes. Sounds great. However, if you take your whole deduction now, that means it won’t be around for you in the future, when most people assume taxes will be higher, making the deductions more valuable in the future. For most businesses the bird in hand will almost surely prove more attractive than the two in the future bush, but this illustrates the fiendish complexity of thinking about and living through taxes now.

May we all live in simpler times.