Suitably Flip

Keep It Simple, Senators

In my view, there are 4 ways you can improve the tax code at any level of government.

1. Lower rates
2. Flatten (ungraduate) the rate schedule
3. Align tax incentives with pro-growth behavior
4. Simplify the code

I typically think of them in that order too, with simplification being an important step, but the one I'd most readily trade in for a similarly sized shift in any of the other variables.

I may need to rethink that though, judging by an IRS study published earlier this week (hat tip: Tax Foundation Blog).

The study, which looks at Tax Year 2001 (hey, it's the federal gummint - give them credit for being caught up to the current millennium) finds that the overall gross tax gap, defined as "the difference between what taxpayers should have paid and what they actually paid on a timely basis" was $345 billion.  Further, they cited the complexity of current tax law as a key cause of the gap, noting the problem "can be seriously addressed only in the context of fundamental tax reform and simplification."

"But, gummint..." you say, "how can we ever implement fundamental tax reform and simplification?"

Well, your President has a few ideas.  He recently presented them to Congress in his FY2007 budget proposal.

• Expanding third-party information reporting to include certain Government payments for property and services;
• Expanding third-party information reporting on debt and credit card reimbursements paid to certain merchants;
• Clarifying liability for employment taxes for employee leasing companies and their clients;
• Expanding beyond income taxes the requirement that paid return preparers sign returns, and imposing a penalty when they fail to do so; and
• Authorizing the IRS to issue levies to collect employment tax debts prior to collection due process proceedings.

Much like reduction of fraud, waste, and abuse, eliminating this undue complexity should be embraceable on both sides of the aisle.  Tax code simplification has the capacity to be a bi-partisan, win-win, arm-in-arm, kum-ba-ya for both sides, one which would knock out a sizable slice of the annual budget deficit without a partisan shot being fired.  No spending cuts, no tax increases.  Just good news to bring home to the consituents without expending an ounce of political capital.

So what's the hold up?

Sadly, as the Tax Foundation notes, these steps don't seem to curry as high a priority with Congress as more partisan moves that flex politicians' "ability to control society’s allocation of resources through preferences in the tax code".

For comparison, the tax reform package that has knocked around both houses lo these many months, causing so much tinkering, compromise, and doomsaying, weighs in at less than $70 billion.  For those keeping score at home, that's about 1/5^th the size of the 2001 tax gap.

Note to legislators: if you're looking for a hero moment (isn't there some election coming up...), think about sponsoring a tax simplification bill that would seek to knock out $100 billion in the annual tax gap.  And don't cram it full of little riders that are going to make it less palatable to your colleagues across the aisle.  In fact, leap across the aisle for co-sponsors.  An apolitical effort focused squarely on reducing needless complexity - and nothing else - would be utterly passable and hugely effectual.

Further:
IRS Tax Gap Figures (pdf)
Tax Foundation's special section on Tax Reform

Comments

Keep It Simple, Senators

In my view, there are 4 ways you can improve the tax code at any level of government.

1. Lower rates
2. Flatten (ungraduate) the rate schedule
3. Align tax incentives with pro-growth behavior
4. Simplify the code

I typically think of them in that order too, with simplification being an important step, but the one I'd most readily trade in for a similarly sized shift in any of the other variables.

I may need to rethink that though, judging by an IRS study published earlier this week (hat tip: Tax Foundation Blog).

The study, which looks at Tax Year 2001 (hey, it's the federal gummint - give them credit for being caught up to the current millennium) finds that the overall gross tax gap, defined as "the difference between what taxpayers should have paid and what they actually paid on a timely basis" was $345 billion.  Further, they cited the complexity of current tax law as a key cause of the gap, noting the problem "can be seriously addressed only in the context of fundamental tax reform and simplification."

"But, gummint..." you say, "how can we ever implement fundamental tax reform and simplification?"

Well, your President has a few ideas.  He recently presented them to Congress in his FY2007 budget proposal.

• Expanding third-party information reporting to include certain Government payments for property and services;
• Expanding third-party information reporting on debt and credit card reimbursements paid to certain merchants;
• Clarifying liability for employment taxes for employee leasing companies and their clients;
• Expanding beyond income taxes the requirement that paid return preparers sign returns, and imposing a penalty when they fail to do so; and
• Authorizing the IRS to issue levies to collect employment tax debts prior to collection due process proceedings.

Much like reduction of fraud, waste, and abuse, eliminating this undue complexity should be embraceable on both sides of the aisle.  Tax code simplification has the capacity to be a bi-partisan, win-win, arm-in-arm, kum-ba-ya for both sides, one which would knock out a sizable slice of the annual budget deficit without a partisan shot being fired.  No spending cuts, no tax increases.  Just good news to bring home to the consituents without expending an ounce of political capital.

So what's the hold up?

Sadly, as the Tax Foundation notes, these steps don't seem to curry as high a priority with Congress as more partisan moves that flex politicians' "ability to control society’s allocation of resources through preferences in the tax code".

For comparison, the tax reform package that has knocked around both houses lo these many months, causing so much tinkering, compromise, and doomsaying, weighs in at less than $70 billion.  For those keeping score at home, that's about 1/5^th the size of the 2001 tax gap.

Note to legislators: if you're looking for a hero moment (isn't there some election coming up...), think about sponsoring a tax simplification bill that would seek to knock out $100 billion in the annual tax gap.  And don't cram it full of little riders that are going to make it less palatable to your colleagues across the aisle.  In fact, leap across the aisle for co-sponsors.  An apolitical effort focused squarely on reducing needless complexity - and nothing else - would be utterly passable and hugely effectual.

Further:
IRS Tax Gap Figures (pdf)
Tax Foundation's special section on Tax Reform