Complexity Is the Root of All Evil (at Least in the Tax Code)
As the national taxpayer advocate, I oversee an independent unit within the Internal Revenue Service that has helped more than four million individual and business taxpayers resolve their IRS account problems, and I am required to report to Congress annually on the most serious problems encountered by U.S. taxpayers.
If I had to distill everything I’ve learned into one sentence, it would be this: The root of all evil is the complexity of the tax code.
There is currently considerable support in Congress to take up corporate tax reform, and corporate reform is certainly needed. But I urge policy makers to remember that, as compared with about two million taxable corporations, there are 151 million individual taxpayers, including 27 million who report sole-proprietor or farm business income with their individual returns. There are also nearly nine million pass-through entities (S corporations and partnerships), the income from which is reported on individual income-tax returns. These taxpayers desperately need relief from the extraordinary compliance burdens the tax code imposes.
I have long believed comprehensive tax simplification is achievable by following the model of the landmark Tax Reform Act of 1986. Skeptics point out that asking taxpayers to give up tax breaks from which they currently benefit will generate pushback, and that’s certainly true. But if policy makers pair substantial reductions in tax expenditures with substantial reductions in tax rates, and maintain current tax-burden levels by income decile, I believe taxpayers will appreciate that their tax burdens on average won’t change much—and they will actually end up better off because they will save money on compliance costs. That approach prevailed 30 years ago, and despite some significant differences in circumstances, it could prevail again today.
I recommend that policy makers consider the following core principles in developing tax-reform legislation:
First, the tax system should not be so complex as to create traps for the unwary.
Second, the tax laws should be simple enough so that most taxpayers can prepare their own returns and compute their tax liabilities on a single form, and simple enough so that IRS customer-service personnel can accurately answer taxpayers’ questions over the phone.
Third, the tax laws should anticipate the largest areas of noncompliance and minimize the opportunities for such noncompliance.
Fourth, the tax laws should provide some choices, but not too many, since choices can be confusing and lead to taxpayer errors.
Fifth, when the tax laws provide for refundable credits, they should be designed in a way that is minimally burdensome both for the taxpayers claiming the credits and for the IRS in administering them.
Sixth, the law should incorporate a mandatory periodic review of the tax code—a sanity check to guard against creeping complexity.
If policy makers decide comprehensive simplification is too heavy of a lift, there are still many steps Congress could take to simplify the tax code in smaller bites. Among them:
Consolidate and simplify the six “family status” provisions in tax code. These include filing status, personal and dependency exemptions, the child tax credit, the earned-income tax credit, the child- and dependent-care credit, and the separated spouse rule. Every individual taxpayer is affected by at least two of these provisions, and many taxpayers are affected by five. I have proposed a family credit and a worker credit to replace them, which would have the added benefit of reducing improper EITC payments.
Simplify other provisions that govern taxation of the family unit, including “joint and several liability” and the “kiddie tax.”
Consolidate the incentives that encourage savings for education. There are now at least 12—far too many for most parents and students to make an informed choice.
Consolidate the incentives that encourage savings for retirement. There are now at least 15—again, far too many.
Reduce procedural incentives for Congress to use tax “sunsets.” More than 70 provisions currently in the tax code are temporary and require periodic renewal.
Minimize income phase-outs, which affect roughly half of all returns each year. They introduce inflated marginal “rate bubbles” and add considerable complexity to tax computations.
Streamline the penalty regime. In 1955, there were 14 civil penalties in the tax code. Today, there are more than 170, many of which are rarely assessed.
U.S. taxpayers have been struggling under the weight of the current tax code for far too long. The Bush and Obama administrations both produced reports with many good simplification proposals, as have the House Ways and Means and Senate Finance committees and others. There is no shortage of good ideas. Now is the time for the administration and Congress to seize the moment and finally, this year, carry tax reform across the goal line.
Ms. Olson has served as the national taxpayer advocate since 2001.
Appeared in the Apr. 18, 2017, print edition.