However, the hard work of tax reform is now underway. House Ways & Means Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) are barnstorming the country to hear directly from Americans – learning first-hand about the inefficiencies of the current system, and how taxpayers will be impacted by an array of proposed reforms.
Ultimately, the most likely feedback they will hear is the need for simplification of a system that has simply grown too complex for most Americans to understand, with damaging consequences to the nation’s economy. The tax code’s byzantine complexity costs business and individuals hundreds of billions in compliance. The IRS's National Taxpayer Advocate estimated that individual and business taxpayers spend 6.1 billion hours to complete filings. This is money and time wasted.
Not only would a simpler code reduce red tape, it would also level the playing field, create a better economic environment for businesses of all sizes, maintain progressivity, and raise revenues for deficit reduction and urgent investments in our nation’s future.
We often hear talk about simplification from both sides of the political aisle. But there is a lot of confusion about what constitutes tax simplification and several red herrings that would actually make the current system worse.
Simplification should never abandon the principle of progressive taxation. One example of such an approach is the so-called “flat tax.” It sounds simple, but in order to keep tax revenue stable the rate would be considerably higher than the 15 percent rate most taxpayers pay today. That means the majority of Americans would be experience a substantial tax hike in the name of creating a tax code with a single rate.
Also in the mix are political gimmicks such as “return free filing,” in which the IRS would just calculate your taxes for you. Such a system would only hide the inefficiencies and dysfunction of the current system from many Americans, reducing support for the reform that is so desperately needed. In addition, there is an inherent conflict of interest in having the taxman do your taxes: If there’s any question about how to apply the tax code, the IRS is likely to choose the interpretation that brings in more taxes.
If Congress and the Administration are serious about simplifying the tax code, any plan must achieve the following five goals:
1) Tax reform must promote economic efficiency and growth. Pro-growth tax reform will help speed economic recovery, bring unemployment down, and shrink the national debt.
2) Reform needs to reduce the number of tax incentives to lower rates and rebuild the nation’s revenue base. Each tax loophole is fiercely guarded by the special interests whom it benefits. Closing tax breaks en masse will not be easy, but it is essential both to lower tax rates for middle class families today, and to whittle down public debts that imply crippling tax burdens on tomorrow's taxpayers—our children.
3) Our tax system must maintain progressivity. Most tax incentives in the code today make it less progressive, not more. Eliminating many tax incentives and using the savings for lower rates, can, in conjunction with maintaining (and maybe even expanding) the Earned Income Tax Credit, maintain or improve progressivity in the tax code.
4) The IRS needs to take steps to reduce errors and avoidance. Tax law complexity often leads to perverse results. Hiring more IRS enforcement personnel, increasing the amount of third party reporting, and radically simplifying the tax code will help close the tax gap and improve voluntary compliance. Common sense simplification of the code – especially in everyday provisions that impact the average American – can make a real difference, and make tax reform real for most taxpayers.
5) Federal and states rules need to be better aligned. While federal tax reform is probably a heavy enough lift for this Congress, simplification will never be maximized unless federal and state governments can come together to better align their tax systems so as to reduce paperwork, streamline the filing process, and create less opportunity for tax arbitrage.
Simplicity and its many benefits are often overlooked in the tax reform debate, which typically centers on economic and redistributive issues. Simplification should be considered a goal of equal importance and should be made a fundamental test of comprehensive tax reform. A democracy should strive to make tax policy transparent and user-friendly to ordinary citizens, so that it becomes an instrument for promoting common prosperity rather than special privilege.
There is a moment of opportunity in this Congress and this administration to do great good in making our tax system more rational and understandable and effective. We need to seize the moment.
Weinstein is an eight-year veteran of the Clinton administration and served as senior advisor to the Simpson-Bowles Commission. He is currently a senior fellow at the Progressive Policy Institute and directs the Graduate Program in Public Management at The Johns Hopkins University.