Federal policymakers are set to return to Washington on May 4 to debate the next legislative proposals to address the coronavirus crisis and global financial fallout. As they weigh existing and new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy options, they should remember the adage to “keep it simple.”
Recent reports suggest that policymakers will discuss additional funding for small business programs, public health workers, medical facilities, expanded testing infrastructure, state unemployment supplements, and other tax measures. No matter how generous a relief package, the policy design should be simple and transparent so that taxpayers can understand how the benefits are determined, how they may be accessed, and how they will be evaluated by any future auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. s and oversight.
Each time a new provision is added to the federal tax code, complexity increases for both the taxpayer and the IRS. Moreover, some provisions are more complicated than others. The simplest technical correction may change only a few sentences on filing forms. By contrast, the most complicated provisions often come with hundreds of pages of regulations, explanations, and ongoing notice and comment before being finalized.
As a guiding principle, policymakers should remember that simpler tax policies and programs lower the compliance burden on taxpayers and make them easier to administer. This generally means the government will be able to provide benefits quicker, more efficiently, and with less need to audit or conduct extensive oversight after implementation.
Transparent policies help businesses and individuals make more informed decisions about their consumption, saving, and economic behavior. This becomes even more critical when responding to a complex public crisis, such as the current health and economic situation. When businesses and taxpayers look to the government for relief, it is paramount that lawmakers do their best to craft transparent and coherent legislation that is the least confusing for all.
As an example, the rollout of the Paycheck Protection Program (PPP) reveals that many small business owners were unclear about what expenses qualified and whether self-employed workers were eligible and under what conditions. Additionally, some tax policy experts continue to question whether certain smaller businesses will actually see relief due to mounting applications, delayed or incomplete information, and limited access to financial assistance.
The next stage of legislative relief should provide clearly written guidelines to agency officials and the public about who qualifies for tax relief and how they obtain it. Overall, a transparent tax policy means that taxpayers should be able to understand their liabilities and benefits and what will be required of them to comply with the policy.
A simple and transparent policy change will be easier for the IRS to administer than a complex policy change, so that the government can collect revenue and disburse benefits in the most efficient manner possible. Further, the more complex a policy is, the more opportunities for taxpayers to abuse the policy, creating more difficulty for enforcement.
Compared to previous iterations, the CARES Act recovery rebates were sent quickly to those who had already filed taxes for 2019 or 2018. In many cases, the IRS possessed the relevant banking information and rebates were directly deposited into filers’ accounts. However, this was not the case universally. Many who filed using third-party services that provide advance refunds or the option to wait and pay filing fees until refunds are disbursed from the IRS have not yet received their CARES Act rebate via direct deposit due to a glitch.
The administrability became even less efficient for non-filers and those without internet access, a population which in many cases needed the rebate the most. In the future, partnering with other government agencies (e.g., the Small Business Administration, Agriculture, Social Security) will be indispensable to overcome information gaps. This demonstrates that a policy’s administrability matters, both to the government in trying to accomplish a policy goal and the taxpayer in waiting to receive their benefit.
In the coming weeks, it is likely that many policies will be debated. Some may have been in statute for years while others are still being created. In any case, the rule of thumb should be to make the policy as simple, transparent, and administrable as possible so that taxpayers can receive the benefits with the least amount of inefficiency or confusion during this crisis.
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