Can We Really Simplify Tax?

Reforming the internal revenue code is a great idea -- until you weigh the costs.
CFO StaffDecember 1, 1998

In this world, there are only two tragedies,” Oscar Wilde wrote in 1892. “One is not getting what one wants. The other is getting it.” The United States had no federal income tax laws in those days and, anyway, Wilde was British. But his words are uncannily relevant to the current push for reform of the Internal Revenue Tax Code. Everyone wants “simpler and fairer” rules. But few seem to really understand what that would mean for them.

To be sure, portions of the tax code are ambiguous, conflicting, and contain explanations that often obfuscate. And while it has never been a “page turner,” the code has grown exponentially in size and opacity since the mid-1980s. Today, the code runs to more than 9,400 pages–six times longer than Tolstoy’s War and Peace. Such a Byzantine code takes a heavy personal and financial toll on individuals and businesses. According to the Tax Foundation, a nonpartisan policy research group, Americans spend 5.4 billion hours a year filling out their tax returns. By some estimates, small businesses spend $7.24 on compliance for every dollar they pay in taxes. Small wonder there is broad bipartisan support for making the rules simpler–and such a proliferation of reform schemes.

House Majority Leader Dick Armey suggests replacing the tax code with a 17 percent flat tax. That way, according to Armey, we’ll be able to file our returns on the back of a postcard. House Ways & Means Committee chairman Bill Archer, meanwhile, proposes scrapping the income tax altogether in favor of a national sales tax. And Rep. Bob Inglis wants to “rip out [the tax code] at the seams and throw it into the Potomac River.”

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I share their concerns. The Internal Revenue Code (which, incidentally, is written by Congress and administered by the IRS) does cry out desperately for pruning and reshaping. The problem is that the code’s complexity is an outgrowth of efforts to make tax changes revenue neutral, to make the code fairer, and to reflect economic realities. Every deduction, credit, exclusion, phase-out, and special rate enacted by Congress generates a slew of regulations. Consider the 1997 Taxpayer Relief Act, which promised potential savings in such areas as capital gains, retirement accounts, and foreign tax credits. Whatever benefits it provided, any relief could come only from a headache remedy. For example, before the act was passed, Schedule D, used for figuring capital gains and losses, consisted of 13 lines. Now it has 54. In the end, the legislation inflated the code by 297 pages.

Simplify the tax code? No problem. One way to start would be by repealing most special provisions–such as the deductions for interest payments, state and local taxes, and charitable contributions. The rich, the poor, and everyone in between would all pay at the same rate. No exceptions. On the corporate side, we could eliminate foreign tax credits and deductions for employee benefits. We could even tax companies on their book income instead of allowing them to use a separate set of figures for taxes.

Such actions would certainly aid reader- friendliness, and even save some trees. Spared the bother of having to calculate an alternative minimum tax or determine which workers are employees and not independent contractors, we could almost fill out our returns and write the check during a TV commercial break. Think the electorate would applaud?

Neither do I. My sense is that those clamoring for simplification would back off in an instant if they understood what they would have to give up in exchange. During my tenure as IRS commissioner, I endorsed simplification as a worthy goal. We took what steps we could administratively to promote simplification. But I also came to believe that most taxpayers would not be willing to trade the current system for a simpler one if it meant giving up the deductions, credits, and exemptions to which they have become accustomed.

We can have a more equitable tax code, or a somewhat simpler one. No one has figured out how we can have both. Perhaps a tax code for the country with the most complex, sophisticated economy ever known to humankind almost has to be complex and sophisticated.