Tax Simplification: Why are taxes so complicated?
Almost everyone agrees that the current tax system is too complicated, yet almost every year the system gets more complex, not less. Why? The reason is that simplicity almost always conflicts with other tax policy goals. Most people believe taxes should be fair, conducive to economic prosperity, and enforceable, as well as simple. But even people who agree on these goals often disagree about the relative importance of each. As a result, policies usually represent a balance among competing goals, and simplicity often loses out to other priorities. For example, most countries tailor tax burdens to the characteristics of individual taxpayers. That can make taxes fairer but also more complex. Income has to be traced from businesses to individuals. Individual characteristics such as marital status and number of dependents, as well as the composition of expenditure or income, have to be reported and documented. These conflicts appear to have been especially relevant in the current tax code, where desires to channel tax cuts to particular groups have added significant complexity.
- The political process creates complexity. Politicians and interest groups support tax subsidies for particular groups or activities. Targeted subsidies inevitably complicate the tax system by creating distinctions among taxpayers and among sources and uses of income.
- Some complexity is necessary to deter tax avoidance. Taxpayers have every right to reduce their taxes by any legal means. But their doing so inevitably raises questions about whether particular activities or expenditures qualify for tax-preferred status. The Treasury Department responds with rules designed to limit avoidance. Taxpayers in turn respond by inventing transactions to skirt the new rules. This can create a vicious cycle that leads to more and more complex rules and increasingly sophisticated and complex avoidance strategies.
- Many complicated provisions were enacted to raise revenue or limit revenue losses during times of rampant budget deficits. For example, the landmark Tax Reform Act of 1986, although a remarkable accomplishment in many respects, fell short of its goal of simplicity in order to meet the requirement of revenue neutrality. The 1986 act created several complicated phase-outs and hidden taxes in order to raise revenue and meet distributional targets.