Washington, D.C. — Calls to simplify the tax code are a familiar refrain on Capitol Hill and on the campaign trail, but efforts to pare down the United States’ complex code must remain focused on fairness and fiscal responsibility, says a new report released today from the Center for American Progress.
“Simplifying the tax system to the extent that a return could fit on a postcard may sound appealing, but simplifying changes should not increase the tax burden on the middle class or sacrifice important priorities like education, infrastructure, or Social Security,” said Alexandra Thornton, Senior Director of Tax Policy at CAP. “It is possible, however, to simplify the tax code in a way that is fair to the average taxpayer—for instance, by getting rid of unnecessary and unfair tax loopholes or by restructuring provisions that are supposed to help the middle class but are not designed for easy access. Policymakers must look beyond snappy sound bites and instead focus on creating a tax system that works for all Americans, not just those at the top.”
CAP’s report outlines three steps policymakers can take to simplify the tax system so that it works better for everyone, raises adequate revenue, and meets Americans’ fundamental understanding of fairness. Those steps are:
- Eliminate special rules and loopholes in the current tax system that complicate the tax code and primarily benefit high-income individuals and large corporations. Though the federal income tax is progressive overall, dozens of special rules in the income tax primarily enable wealthy individuals and corporations to avoid paying taxes that they would otherwise have to pay on some or all of their income, and many wealthy and corporate taxpayers spend enormous resources looking for ways to avoid paying taxes. One of CAP’s recommendations in this area calls for all large businesses to pay the corporate income tax, regardless of their organizational form, an issue highlighted in a recent CAP report on pass-through taxation that showed that more than 70 percent of partnership and S corporation receipts go to big businesses.
- Use some of the revenue saved from closing those tax loopholes to simplify two of the most important areas of middle-class tax incentives—education and retirement savings—so that those incentives better accomplish what they were intended to do. Many middle-class tax incentives are not delivering on their promises because they are too complex. Complex provisions are less likely to be taken up by lower-income individuals, who lack access to advisors that could help them maximize the options; for instance, the tax code provides at least nine tax incentives for higher education, and the evidence shows that retirement savings tax incentives are among the least accessible incentives to low- and moderate-income taxpayers.
- Eliminate some of the accounting and other administrative tax burdens faced by truly small businesses, which lack the resources of large corporate taxpayers to deal with tax compliance. Complicated tax rules represent a significant cost for small businesses, which lack the resources to hire expensive tax and accounting assistance. Making tax rules simpler for small businesses would enable them to comply with tax rules more affordably and could even remove one barrier to entrepreneurship.
Read “Tax Simplification That Works for Everyone” by Alexandra Thornton.
For more information or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.