Top Five Options Guide Reforms to Simplify the Tax Code

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’s new book, Options for Reforming America’s Tax Code 3.0  models the economic, distributional, and revenue effects of 86 different changes to the tax code. Within the book are options that would simplify the tax code and options that would make it more complex.

One of Tax Foundation’s core principles of sound tax policy is simplicity: tax codes should be easy for taxpayers to comply with and for governments to administer and enforce. Below are several options from the book that would significantly simplify the tax code.

Eliminate the Individual Alternative Minimum Tax (Option 38) and Repeal the Corporate Alternative Minimum Tax (Option 74)

Alternative minimum taxes (AMTs) run parallel to the regular tax code. They set a floor on the tax a person or business pays. AMTs often require the taxpayer to calculate their tax liability twice—once under the regular income tax, and a second time under the AMT.

The individual and corporate AMTs grew out of similar political problems in the 1960s, 1980s, and more recently in the 2020s. Lawmakers and voters were upset that average tax rates for some high-income individuals and large corporations were lower than top marginal rates.

Low average tax rates do not necessarily indicate a policy problem. Sometimes, sound and simplifying reforms like full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for capital assets (see below) will produce low effective rates for businesses in the short term that mostly even out in the long run. These are good, pro-growth reforms, and the low effective tax rates they produce are a temporary feature rather than a bug.

Sometimes, though, tax preferences that Congress enacted—credits and deductions—will produce low average tax rates that then upset lawmakers. Rather than addressing those tax preferences head-on, Congress has created AMTs.

The individual AMT has been in place since 1969. Several subsequent laws, most recently the Tax Cuts and Jobs Act (TCJA) and the One Big Beautiful Bill Act, have limited its reach. The Congressional Budget Office projects that fewer than 600,000 taxpayers will pay the AMT in 2026, 0.3 percent of all returns. But it remains burdensome for those subject to it: the National Taxpayer Advocate once wrote that “the AMT nearly doubles the burden of filing a federal income tax return.”

Congress created a corporate AMT in 1986, and then repealed it starting in 2018 under the TCJA. The 2022 InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin Reduction Act reinstalled a corporate AMT under a different set of rules. Survey data from the Tax Executives Institute suggests the new corporate AMT has led to significant compliance burdens for US companies and relatively little new revenue.

These two options would eliminate the individual and corporate AMTs. By extension, they would eliminate the complex and parallel tax systems AMTs have wrought. Policymakers concerned about lost revenue from these options could fill the gap by addressing the various deductions and credits that produce low average tax rates (though not all deductions are loopholes).

Create Universal Savings Accounts (Option 39)

The tax code currently includes several tax-neutral savings vehicles, each with different rules. Many Americans are familiar with retirement options like 401(k) plans and individual retirement accounts (IRAs), but the universe of savings accounts extends well beyond these popular options. A few are summarized in Table 1 below:

Table 1. Comparing Tax-Neutral Savings Accounts and Their Federal Revenue Effects

Note: N/A = not available. * Includes cost of child and 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. (CDCTC), since JCT combines these two entries in its tax expenditures estimate.
Source: Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2025-2029,” Dec. 3, 2025.

Over the past few years, members of Congress in both parties have proposed even more new tax-neutral savings accounts, including accounts for first-time homebuyers, lifelong skills-building, and disaster mitigation and recovery expenses.

Multiple savings accounts compound the amount of paperwork, tracking, and account maintenance required of taxpayers. They increase administrative burdens on the IRS and Treasury Department. They also violate the principle of neutrality by providing neutral treatment only to certain types of saving while leaving other types subject to higher effective tax rates.

This option establishes Roth-style universal savings accounts (USAs), permitting individuals to contribute $10,200 post-tax to a USA in 2027, indexed to inflation thereafter. Unused “contribution room” can be carried forward to the next year. Earnings on contributions grow tax-free. Withdrawals are allowed at any time for any reason without penalty or further taxation and are added back to contribution room.

To further simplify the tax code, Congress could consider phasing out the use of other savings accounts, such as HSAs, FSAs, and 529 plans. Lawmakers would need to carefully consider the transition from the current set of accounts to one USA option.

Reform the Earned Income Tax Credit and Child Tax Credit (Option 21)

Parents can claim a child tax credit (CTC) of up to $2,200 per child in 2026. The CTC begins to phase out for single filers making more than $200,000 per year and joint filers making more than $400,000 per year.

Low-income parents (and low-income childless workers) can also claim the earned income tax credit (EITC). The EITC rules vary by the taxpayer’s filing status and their number of qualifying children, as summarized in Table 2 below:

Table 2. CTC and EITC Parameters Under Current Law, 2026

Source: Garrett Watson and Alex Durante, “2026 Tax BracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.,” Tax Foundation, Jan. 1, 2026, https://taxfoundation.org/data/all/federal/2026-tax-brackets/.

The original intent for the EITC was to reward work. It still does so today, but it also functions as a second CTC. The maximum childless credit is a relatively small $664 compared to the $4,427 maximum for a taxpayer with one child.

The different phase-in and phaseout rules for the EITC, and complicated qualifying child rules, create complexity for taxpayers and administrative burdens for the IRS. Compounding the confusion is that a taxpayer’s children are eligible under the EITC through age 18 (age 23 if the child is a full-time student) but only through age 16 for the CTC.

This option would reform the EITC and CTC so that one is strictly a work credit and the other is strictly a child credit. These simplifying reforms are summarized in Table 3 below:

Table 3. CTC and EITC Parameters Under Tax Foundation’s Options Guide

Source: Tax Foundation, “Option 21: Reform the Earned Income Tax Credit and Child Tax Credit,” https://taxfoundation.org/tax-reform-guide/option/reform-the-earned-income-tax-credit-and-child-tax-credit/.

Enact Full Expensing for All Capital Investment (Option 53)

Under a hypothetical cash flow tax, US businesses would deduct from their gross revenues all the expenses they incurred while doing business:

• If a business paid $500,000 in wages and salaries each year, it would deduct $500,000.
• If it purchased $200,000 of machinery and equipment, it would deduct $200,000.
• If it spent $2 million purchasing a new building and renovating it for use by its employees, it would deduct $2 million.

That is not how the US tax code works today. While some expenses, like wages, machinery, and equipment, are often fully deductible in the year of expense or purchase, buildings and other structures must be depreciated over many years.

The various sets of rules that determine depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco and amortization create more paperwork and tax planning for businesses, and more work for the IRS. They also raise the after-tax cost of investing in certain assets. This means less investment occurs than if these assets could be fully and immediately deducted.

This option would allow full and immediate deductions for all capital assets, including structures. Businesses would no longer need to follow complex depreciation schedules—a $100 expense would lead to a $100 deduction, every time.

Integrate the Corporate and Individual Tax Systems Through a Dividend Deduction (Option 60)

While many of the country’s largest businesses are C corporations, the vast majority of businesses in the US are instead pass-throughs: sole proprietors, partnerships, S corporations, and limited liability companies (LLCs).

These businesses are called “pass-throughs” because their profits are not taxed at the business entity level. Instead, profits pass through the business to the individual owners of the business. The individual owners then pay business taxes on their individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source returns.

C corporations, by contrast, pay taxes at the entity level and at the shareholder level. As a result, C corporation income is taxed twice: once when the business pays the 21 percent corporate tax, and again when the business’s investors pay capital gains or dividend taxes.

Having two different business tax systems in the US means having two different sets of rules and rates in the tax code. It also drives some businesses to choose their status based largely on the tax implications.

This option addresses the double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. of C corporation income by allowing C corporations to deduct the dividends they pay to their shareholders. C corporations and pass-throughs would both face one layer of taxation. This option would reduce distortions in the tax code and bring policymakers one step closer to being able to fully integrate US businesses under one set of rules and rates.

Big Picture

Congress has enacted some major simplifying tax reforms in recent years, including many TCJA individual and business provisions. In general, though, the tax code has grown more complex in recent decades. Proposals for new carveouts, savings vehicles, and targeted tax increases threaten to complicate it further.

The reforms in the Options Guide outlined above demonstrate that lawmakers can instead pursue a simpler tax code with fewer burdens on both taxpayers and the IRS.


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