Tax Simplification: Issues and Options

The notion that taxes should be simpler is one of the very few propositions in tax policy that generates almost universal agreement. The fundamental paradox of tax simplification is that despite this consensus, almost every year tax rules become more complex. This report, based on recent congressional testimony, examines a broad range of issues regarding tax complexity. Section II discusses the costs, benefits, causes and sources of complexity. Simpler taxes have numerous benefits. They would reduce taxpayers’ costs of complying with the tax system in terms of time, money, and mental anguish. They would likely raise the use of tax subsidies — say, for education — reduce unintentional tax evasion, and increase the likelihood that taxpayers would see the tax system as fair. But simpler taxes also have costs. In particular, they reduce the ability of policy makers to achieve other goals of tax policy. Features of the tax code that are designed to increase tax equity, police intentional tax evasion, or encourage some particular activity often increase comWilliam G. Gale ([email protected]) is the Joseph A. Pechman Fellow at the Brookings Institution. This report investigates a series of issues regarding tax complexity and efforts to simplify the tax system. These issues include: the costs, benefits and causes of complexity; the direct and prospective effects of the new tax law on simplification efforts; principles and proposals to simplify the current system; a review of estimates of the compliance costs of the current system; and the simplification prospects provided by the flat tax and the national retail sales tax. This report is a slightly revised version of testimony presented in the Congress on July 17, 2001. Gale’s analysis of tax simplification has been influenced by discussions and collaborative research with Len Burman, Janet Holtzblatt, and Joel Slemrod. He thanks Samara Potter for assistance. The views expressed are the author ’s and should not be attributed to other researchers, or to the trustees, officers, or staff of the Brookings Institution.