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A Muddled Tax Code Reflects Muddled Thinking

2 min readBy: Alan Cole

An interesting and delightfully contrarian piece from this 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. season was from Howard Gleckman at the Urban Institute: Does Anyone Care About a Simple Tax Code? Gleckman rightly points out that while tax code simplicity has long been a goal of reformers, it becomes less and less relevant to individuals, who no longer do those calculations themselves.

It’s a fair point. Computer software has made tax filing much easier than it otherwise would be for many individuals. However, compliance costs – in terms of time or money – are not the only drawbacks of a complex system.

There is a broader point to be made – that the clarity of a tax code resembles the clarity of the thinking that went into its design. Consider the recent tax reform developments in New York. New York used to have four different ways of calculating state corporate taxes, and companies were to choose the largest of the four.

This reflects a kind of confusion of economic thinking – as if New York’s lawmakers were unsure of how to properly levy a tax, so they threw a bunch of different ideas together in an arbitrary way. With the corporate tax overhaul of this spring, New York will eventually reduce the number of bases to two. It is no coincidence this also happens to be good tax policy.

We should be similarly skeptical of the complexity of the individual code – even if it no longer bothers users of tax preparation software. What is the proper way to treat children in the tax code? Should we list them as dependents? Should we have a child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. ? Should we alter the size of the earned income tax credit based on number of children? Should we have a child and dependent care credit? Why not have all of them at once?

A government that produces ten ideas to address a situation is by no means ten times smarter than a government that produces one.