For nearly 65 years, the 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. Foundation has argued that the tax code should be simple, stable, neutral, and favorable to economic growth. At a recent luncheon we hosted in New York, we discussed how far the tax code has drifted away from that ideal.
Titled “Tax Simplification: How to Move From Study to Action,” the purpose of the luncheon was to ask the leading experts on the tax code’s complexity to identify the areas of the tax code most ripe for simplification and to discuss ways in which lawmakers could be motivated to simplify the code. What we learned is that there is broad agreement on which parts of the tax code pose the most complexity for taxpayers, but little agreement on what it will take to get Congress to act. As one participant noted, “There is no constituency for tax simplification.”
Last year, however, Congress took a small step in the right direction by instructing its own tax experts at the Joint Committee on Taxation (JCT)The Joint Committee on Taxation (JCT) is a nonpartisan congressional committee in the United States that assists both the House and Senate with tax legislation. The JCT is chaired, on a rotation, by the Chair of the Senate Finance Committee and the Chairman of the House Ways and Means Committee. to conduct a study on the tax code’s complexity. This spring, the JCT delivered a massive three-volume, 1,300 page study—itself a testament to the code’s complexity.
The Committee’s staff director, Lindy Paull, told our audience that there is no single source of complexity in the tax code. Rather, tax complexity is brought on by a combination of forces, including: (1) the law’s lack of clarity and readability; (2) the use of the Federal tax system to advance social policies; and, (3) the interaction of Federal tax laws with State laws and the laws of foreign countries.
Leading the study’s list of tax code provisions that deserve elimination or reform is the individual and corporate Alternative Minimum Tax (AMT)The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system. . Created in response to charges that a handful of wealthy individuals and corporations were able to avoid paying income taxes by using various deductions and credits, the AMT “no longer serves the purposes for which it was intended,” says the Committee. Indeed, within 10 years, “the number of individual taxpayers required to comply with the complexity of the individual alternative minimum tax will continue to grow… [reaching] more than 11 percent of all individual taxpayers.”
Another serious problem facing individual taxpayers is the lack of a standard definition for what is a “qualifying child.” Taxpayers who try to determine whether or not they are eligible for the dependent exemption, the earned income credit, the child credit, the dependent care 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. , and the head of household filing status, all face a different definition of what is a “qualifying child.” Simplifying these definitions would benefit millions of taxpayers who claim these various credits and deductions.
Speaking for the Bush Administration, Pamela Olson, Deputy Assistant Secretary of the Treasury, reported that they are developing a three-pronged strategy to promote tax simplification. First, they are looking for steps they can take to weed out needless complexity without waiting for Congress to pass legislation. They have found a good deal of complexity resulting from regulations, rules, and court decisions that could be corrected by executive order.
They are also compiling tax simplification measures to include in next year’s budget submission to the Congress. The challenge the Administration faces, however, is what can be done within the constraints of the now dwindling budget surpluses. Ironically, many of these simplification measures would be “scored” as losing revenues for the Treasury even though they would benefit millions of taxpayers. As Wall Street Journal Editor Robert L. Barley wryly observed in a column about our roundtable discussion, “Congress won’t abolish the outmoded AMT because, well, the more of the middle class it traps the more revenues it raises.”
For the long term, economists at the Council of Economic Advisers are studying a number of proposals to fundamentally overhaul the tax code, including the flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. and the national retail sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. . Any Administration action on these proposals will have to wait for a second Bush term.
Echoing the findings of these public sector studies is an important joint project of the American Bar Association, the American Institute of Certified Public Accountants, and the Tax Executives Institute. The significance of this project should not be missed. The members of these organizations are the lawyers, CPAs, and corporate tax professionals who make a good living navigating the tax code on behalf of their employers and clients. If the Code is so complex that even they can’t agree on its meaning, then it’s too complex for everyone.
Last year, they issued their own set of recommendations for simplifying key areas of the tax code. Like the Joint Tax Committee, these professionals called for eliminating the individual and corporate AMTs, simplifying the definition of dependent children, eliminating the phase-outs of numerous tax provisions, and simplifying the taxation of capital gains.
As we’ve seen in Washington all year, tax debates typically generate more rancor than harmony. So it’s heartening to see that tax experts inside and out of government are in such agreement over where to simplify the tax code. But Washington will not act to reform the tax code until the noise level from average taxpayers becomes too great to ignore. It’s time to start shouting.Share