How to Simplify the Tax Code. Simply.

This first thing that can be done is to drastically reduce the paperwork

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We are in the midst of a burst of new thinking about revising the Internal Revenue Code, and the voices in favor of simplification for both corporate and personal taxes are getting louder. Apple CEO Tim Cook, who recently testified before the Senate on legal tax avoidance, commented that “Apple’s tax return is two feet high. It’s crazy … It’s time to trash [the code] and go back to something simple.” But long before the current tax controversies, many people embraced the idea of radical simplification of the code.

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Tax simplification is often thought to involve big issues on which Americans are sharply divided — which loopholes should be closed, whether rates should be made more or less progressive, whether exemptions should be expanded or instead eliminated. While debating those issues, we must not lose sight of the excessive paperwork and reporting burden that the tax system imposes on the American public. Serious efforts to reduce that burden would save a ton of time and money for individuals, nonprofits and businesses both large and small. Even without resolving the divisive issues, we could undertake those efforts through a bipartisan war on paperwork.

The Department of Treasury imposes about 6.7 billion annual hours in paperwork per year (in monetary terms, about $134 billion, a larger amount than the discretionary budget of nearly all Cabinet departments). The IRS accounts for the bulk of that burden, most of which is required by Congress. By streamlining the system, reducing redundancy and allowing less frequent and detailed reporting, Congress could cut that figure significantly. It should also give serious consideration to an idea that would count as a genuine game changer.

Suppose that in late February of next year, you received a pre-filled tax return, complete with the relevant information. Suppose that the return was accompanied by a brief letter asking you to make any corrections, to sign the return and to file it (electronically if you like). The whole process might take five minutes.

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An approach of this sort, called the Simple Return by Austan Goolsbee, former chair of the Council of Economic Advisers, could be used by up to 40% of taxpayers, and all by itself it could eliminate hundreds of millions of hours in annual paperwork burdens. California is already using a program of this kind, called Ready Return, and some version of the basic system is in place in several European nations, including Denmark, Sweden, Portugal, France and Spain.

In principle, this approach is feasible for the U.S. Many millions of Americans receive their income from just two sources: their employer and a single bank. The IRS gets that information already, and it could use it to create pre-filled returns. The Simple Return program would be purely voluntary. People could opt in and see how it worked.

To be sure, the Simple Return faces challenges, both political and administrative. In California and elsewhere, it has been fought intensely by tax preparers, including TurboTax, which have a large economic stake in requiring taxpayers to do the paperwork on their own. Fortunately, proposed legislation (the Autofill Act of 2013) has been introduced to adopt the Simple Return. Unfortunately, other legislation has been introduced to forbid the IRS from taking steps in its direction.

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In addition, much of the current concern about complexity comes from corporations and nonprofits. Consider Apple’s 2-ft. return. While it’s not clear whether something like the Simple Return could be designed for corporate and nonprofit taxpayers, an aggressive reduction in the number and complexity of the required forms should be part of the first order of business.

People also have real questions, especially in the current climate, about how to ensure accuracy and especially to reduce the risk that the IRS will err in the government’s direction. These questions need to be answered, but in principle, they should not be obstacles to serious consideration of the Simple Return.

To those who oppose that particular proposal, the fundamental question remains: What will Congress do, now or soon, to reduce the unacceptably high paperwork and reporting burdens now imposed on American taxpayers?

17 comments
martel1989
martel1989

Graduated flat tax.  No deductions, depreciations, loopholes for anyone for any reason. Start rates at 2.5% and increase up to a 20% maximum rate. Quit using the tax system for social engineering.

johnr34231
johnr34231

Simplifying the tax code is like cutting government spending; everyone is for it in general. However, when you get down to specifics any consensus disappears. Those who will end up paying more taxes because of it will squeal like stuck pigs, and ultimately little or no simplification will result.

beaup
beaup

Now, at the moment we are learning more and more with every day about the (either) incompetence or avirice of the IRS, you suggest we trust them to help prepare our taxes? Seriously? Who possibly would trust them now? Who would believe they would put the taxpayers' beta interest first?

Onepatriot
Onepatriot

Any time the government requires  a citizen  to file or report information, it shouldn't be so complicated that you have to consult a tax person or attorney to fill it out.  It should be a simple form.  Hard to understand why Congress allowed it to get so far out of hand that people managed to carve a whole industry out for themselves because of it. Cut out all those deductions that are frivolous and see where we are then.  If it isn't something that benefits the nation get rid of it. 

Education credits are good if they are relevant to your career, but if they're for your own edification, then why should government get involved in that?  Maybe a limit on student loans and grants. 

2947
2947

Yes, but a simpler tax code means increased tax revenues to the Federal Government.  The Fed would make more money if the law were less complex.  A Federal sales tax would be good at capturing taxes from all people in the County - legals, illegals, tourists, democrats, republicans, independents, liberertarians, and even spies.  Imagine spies paying taxes to the US to spy in the US now that's an efficient tax collection mechanism. 

hgsinvestor
hgsinvestor

There are armies of tax accountants and lawyers whose livelihood depends on a complex tax code.  Good luck on defeating that lobby.

TheBoss
TheBoss

This is how it is done in Norway. For many years.

CliffordSpencer
CliffordSpencer

Did Nixon misuse the IRS?

  Didn't Americans learn not to trust Republicans?

BorisIII
BorisIII

Every government type of job is so obsessive compulsive about constantly documenting and proving that the gov is getting its money worth out of your day.   That you spend a large amount of your time showing the gov your getting all the required work done.  Leaving little time to do any extra work that you would like to also do.  When the supervisors know who the good workers are.

JohanZartharnicy
JohanZartharnicy

In today's news; talk of simplifying the tax code increased  new tax laws by 17%.

Whatanotion
Whatanotion

I worked as a tax preparer for a national firm for the first time this year.  I doubt I will ever do it again.  Many people are happy to pay hundreds of dollars for me to spend 5 minutes inputting their data into an algorithm that files their income tax return.  The interview is designed to scare the taxpayer into not wanting to attempt his own filing.  These people want every tax preparer to be licensed and they lobby congress to create this fake employment. It requires no more than a 5th grade education to input the coded data yet they charge about $90 per hour and pay minimum wage.   Simplification would be a huge tax break for the average citizen.

tom.litton
tom.litton

@hgsinvestor That counts for about 3% of the electorate at most?  I can't think of a better example of how much our political system is broken when something that could benefit 97% of the people gets killed in favor of 3% because they are capable of speaking more loudly. 

mantisdragon91
mantisdragon91

@CliffordSpencer GWB did as well when he had them threaten to take away the tax exempt status of churches who preached  against the Iraq war in the run up to the 2004 election.

CliffordSpencer
CliffordSpencer

@BorisIII ,

  Doesn't BIG BUSINESS want government support?

 How many BIG BUSINESSES pretend that they are only a small business?

notLostInSpace
notLostInSpace

@tom.litton @hgsinvestor You are forgetting the legions that depend on the tax code in some way......realtors, mortgage companies, solar panel sellers when there are credits, and the non profit world.  No one is willing to give up their little piece of the sacred code, and there will be huge winners and huge losers in any change.  I would find it nasty if the mortgage deduction went away without something in its place, it would cost me about 8k a year which I cannot afford, and there are predictions of a housing collapse if the mort. ded. went away.

tom.litton
tom.litton

@notLostInSpace @tom.litton @hgsinvestor Deductions are a separate issue.  All that would have to happen, in most cases, would be for the mortgage holder to send the report to the IRS so they can pre-fill in that line instead of (or in addition to) sending it to you.  Ideally the process could account for most deductions.  

It could become so simplified and automated, that they could run the calculations monthly and adjust the amount taken out of your paycheck.  You would never have to worry about paying taxes again. 

It wouldn't work all the time and wouldn't work for everyone, but it would simplify the lives of many people. 

I think the entire tax code does need to be redesigned from the ground up, including deductions.  Yes there will be winners and losers regardless of what you do.  It's another reason to ditch the current code and start over.  Let the politicians publicly support deductions they think are necessary while the public's eye are on them.