Homepage

News > Jobs & Economy
    SAVE   |   EMAIL   |   PRINT   |   RSS  
Tax simplification: not so simple
President Bush wants to take some pain out of paying taxes. But making taxes simple won't be easy.
July 21, 2005: 10:24 AM EDT
Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - There's no end to the analogies used to describe just how broken the federal tax system is. It's been likened it to an overbuilt house that's crumbling, a floor littered with too much garbage, and a blackboard with no space left to write.

When President Bush set out to overhaul the tax code earlier this year, he specifically identified a simpler system as one of his primary goals.

On Wednesday, reducing the complexity of income taxes was a major theme as the nine-member bipartisan panel studying concrete ways to fix the system held its 10th public meeting. One panel member called simplification of the code "paramount" and "our main objective."

In the nearly two decades since Congress last cleaned up tax laws, more than 14,400 changes have been made to the Internal Revenue Code. Today the code and its myriad regulations take up nearly 100,000 pages – with a word length that is about 10 times the size of the standard English version of the Bible.

In establishing the President's Advisory Panel on Federal Tax Reform in January, Bush directed the group to finds ways to fix the current system as one of a handful of proposals expected by the end of September in preparation for a legislative push in Congress later this year or early 2006.

Bush has not specified what kinds of changes he'd like, whether it's something radical like a national retail sales tax or something more tame like tweaking the current code. On top of a simpler system, however, Bush has said he wants a tax code that is fair, pro-growth and doesn't raise or cut government tax revenues.

It's a tough mandate -- and one that has meant different things to different people. To some, the only way to simplify is to do something radical like toss the current code and start from scratch. That's what proponents of getting rid of income taxes and replacing them with a national sales tax would like (for more about life without the IRS, click here).

Others are pushing for something slightly less radical: a European-style tax system.

For all the dramatic ideas, however, surely there must be a relatively easy way to fix what we've got. It seems hard to believe that the bloated federal tax code and its regulations, at 10 million words, couldn't easily drop a few million words here or there. Consider:

  • Individual taxpayers are subject to at least 13 different tax rates, including six different income tax rates, four capital gains rates, and two dividends rates. Couldn't the panel recommend cutting the number of rates for each category in half?
  • The tax code contains about five separate definitions of a "child." Why not one definition with one expiration date? How about.....18, the dawn of adulthood?
  • "Qualified higher education" has three different meanings, according to the IRS. Wouldn't one definition do the trick?
  • The 15 most common tax benefits for families contain 14 different phase-out periods and nine different calculations of income. Wouldn't less be more?

But simple sounds...so simple

But the nip and tuck strategy isn't as easy as it sounds.

Simplifying the tax code often means that other key principles of taxation, like fairness and efficiency, get sacrificed, according to Gene Steuerle, a co-director of the Tax Policy Center, a non-profit tax policy analysis group based in Washington, D.C.

"Not every simplification is fair or efficient and not every move to fairness or efficiency is simplifying," said Steuerle, a former Treasury Department official who helped coordinate the 1986 federal tax reform.

As an example, Steuerle cites what would need to happen if two common credits for children -- the child credit and the Earned Income Tax Credit -- were combined for simplicity's sake.

One credit is allowed for children up to the age of 16. The other applies to older children, possibly even through college age. Combining the two credits would require picking a common age. Depending on the age selected, either more families or fewer families would benefit.

And the amount of tax revenues collected would also change. If they decreased, Congress would theoretically have to raise taxes elsewhere to offset the decline to meet Bush's goal of revenue neutrality.

Similarly, there is broad agreement that the alternative minimum tax (AMT), a complex and parallel tax system intended to ensure that the richest Americans pay income tax, is unfairly hitting more middle-income taxpayers every year. But the AMT is expected to contribute an additional $20 billion in tax revenues this year. Abolishing it would mean that Congress would have to raise taxes someplace else (for more on the AMT dilemma, click here).

"I used to believe that you could slay the dragon and get one perfect tax code that everyone would embrace," said Timothy Kane, an economist at the conservative Heritage Foundation. "I've come to realize there will always be competing interests. We're stuck in this eternal battle."

Agreed Steuerle: "Any systemic reform identifies winners and losers The only way to keep everybody whole is the status quo."

--------------------------

To find out more about tax reform and ways to trim your tax bill, click here.  Top of page

graphic


YOUR E-MAIL ALERTS
George W. Bush
Government
Taxation
Internal Revenue Service (IRS)
Manage alerts | What is this?