Tax simplification

January 21, 2004

Free Market Foundation

Complexity has plagued the U.S. federal income tax since its beginning in 1913. As early as 1928, the U.S. Congress’s Joint Committee on Taxation (JCT) issued a report containing many familiar complaints. However, it concluded that there was a severe limit
to tax simplification, because the complexity of modern business operations necessitated a high degree of complexity in the tax system.

For big companies, tax complexity is a necessary fact of life and they can afford to hire experts to figure it out. But for small businesses and individuals, complexity imposes real costs.

In 2002, the General Accounting Office found that small businesses overpaid their taxes by $18 billion over the previous two years because of errors on their tax returns.

Another GAO report that year found that as many as 2.2 million taxpayers overpaid their taxes by not taking advantage of all the deductions they were legally entitled to.

A new JCT report shows just how hard it is to take advantage of all the tax provisions that might save on taxes. It lists all the so-called tax expenditures, including 5 pages of new ones enacted just last year. The really big ones, however, are not those that benefit big businesses, but the middle class. For example:

More than 33 million taxpayers avail themselves of the mortgage interest deduction, saving them $59 billion in taxes.

Thirty-eight million taxpayers claim deductions for charitable contributions, for a tax saving of $37 billion.

It is doubtful that many taxpayers claiming such deductions would give them up just to get a simpler tax system. As Brookings Institution economists Bill Gale and Leonard Burman have observed, “Most people don’t mind complexity that directly reduces their taxes.”

Source: Bruce Bartlett, Tax Simplification, National Center for Policy Analysis, January 5, 2004.

For more on Income Taxes http://www.ncpa.org/iss/tax/

FMF Policy Bulletin\13 January 2004