What are bed buffaloes and how did they get in our tax code?

A "bed buffalo" is one of my favorite expressions--it's a term I adapted decades ago from a wonderful Far Side cartoon by Gary Larson.

The cartoon showed a wife shaking her husband awake in their bed with the words: "Harold, wake up! I think we've got bed buffaloes!" And sure enough, there were two of Larson's distinctively drawn bison lurking in the bed, their heads poking out from under the covers.

So, a bed buffalo is kind of like a bed bug, only bigger, messier, and more annoying.

In a public finance context, I use the term "bed buffalo" to refer to confusing technical issues that lurk under the surface, that potentially create lots of problems for politicians, bureaucrats, businesspeople, rank-and-file taxpayers, or all of the above. Because the issues are so technical and arcane, it's often tempting to ignore them. But that can create even bigger problems, as the bed buffalo multiply and compound the confusion.

There are a surprising number of bed buffaloes in the tax code affecting many low-income working families across the country, like those served by the Volunteer Income Tax Assistance (VITA) site I coordinate at Union College in partnership with the Schenectady County Department of Social Services.

Our VITA site is part of a service-learning course for our economics students, Eco 391 Income Tax Policy and Practice. In addition to preparing and e-filing free tax returns for low-income working families in Schenectady, my students learn about relevant economic research about tax policy.

Right now, my students are away on their winter break, studying tax law independently with the help of IRS training materials for the IRS certification exam they'll take on the first day of class when they return in early January.

Partly this blog is an instructional tax commentary designed to give my students a "heads-up" warning about some of the bed buffaloes in the tax code that could create serious errors in tax returns for our working family clients. VITA volunteers at other sites are welcome to use these tips as well. I also welcome anyone who who would just like to get a better understanding of how the nuts and bolts of our tax code apply to low-income and moderate-income working families.

And partly this blog is my public policy commentary on the tax code. Many of the bed buffaloes got into our tax code through a combination of good intentions colliding with political reality. But with all the economic uncertainties looming over the country, the states, and the world, it's high time that our tax code worked smarter.

Roughly 30% of the US Gross Domestic Product gets spent by federal, state, and local government in the US. This proportion has stayed roughly level for many decades, but many policy analysts believe it will have to increase in the future as the government deals with increasing health care costs and an aging population.

Many policy analysts are also calling for greatly increased public sector spending to deal with the fallout of the financial crisis. Moreover, many state and local governments are facing great financial difficulties because the current financial crisis has eroded their traditional tax base.

How the government chooses to raise revenue, what kinds of activities it chooses to tax and what kinds of activities it chooses to subsidize through the "tax breaks" built into the tax code has the potential to shape the future economic development and prosperity of our country in important ways.

This is no time for more bed buffaloes in the lives of ordinary citizens, confusing and arcane tax code provisions that induce taxpayers to waste their time on stupid tax provisions. Our economy has gotten into trouble because of lots of bad decisions made even by highly educated people working in a complex set of financial rules they didn't understand, who couldn't see the forest for the trees.

Some of the blame for that confusion lies in our complex tax code, which encourages "creative accounting" that provides poor information for decision-making. We need an economic system that encourages all Americans to make smarter decisions. And that includes the tax system which affects each and every one of us.