Tax simplification

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

    FMF Policy Bulletin\13 January 2004

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