What is the Simplest Tax System?
December 8, 2014
You might be tempted to say, “a non-existent tax” is the simplest, though that would not accurately answer the question. Instead, a per-person or lump-sum tax is arguably the right answer.
Economist Joel Slemrod provided this answer in his chapter in Henry Aaron and William Gale’s book, Economic Effects of Fundamental Tax Reform. The topic of tax complexity was an important part of the discourse concerning fundamental tax reform at that time, and still is today. Nonetheless, complexity in the tax code has become increasingly prevalent since the 1990s.
In fact, complexity was the key issue facing taxpayers in 2012 as reported by the Taxpayer Advocate Service’s annual report. Moreover, the 2013 annual report cited onerous tax return filings that require taxpayers to outsource tax filing to professional preparers and concerns with “voluntary compliance” as key issues of complexity.
Normative economics aside, a per-person tax is one of the most economically efficient taxes for raising revenue. The tax does not distort economic decision-making, is broad-based—applying to everyone equally—and offers a simpler way to comply with the IRS. Regardless of the desirability of such a tax structure, it serves as an exemplar of simplicity.
Lawmakers not only have an implicit contract with voters to legislate in an efficient, practical, and simple manner—i.e., holding compliance costs low—but also de facto have the obligation to legislate in an understandable, non-vague fashion, as it is a constitutional standard. The Supreme Court case from 1926, Connally v. General Construction Co., declares this.
As Slemrod mentions, interesting questions seldom have a simple answer. A per-person tax ranks high on efficiency but could raise distributional concerns; meaning, too much simplicity may not be worth it. However, even the most challenging of tradeoffs are often accompanied by certain principles that, when followed, increase the probability of desirable outcomes. Simplicity is one of those principles of sound tax policy and should be remembered in any tax reform discussion.