The voices of Tax Policy Center's researchers and staff
As the April 18 deadline for filing income tax rapidly approaches, many people will complain about how complicated the process is. But there is a flip side: The income tax provides “one stop” shopping that enables people to receive, in one fell swoop, the benefits of numerous social policies and economic incentives. Including these programs in the tax code complicates tax filing but simplifies people’s interactions with government.
Consider a retail example: In the old days, people shopped at the butcher, the baker, the pharmacist, the florist, and so on. Now, all those options are available in one superstore. This makes shopping easier and requires less time. People may bemoan the loss of mom-and-pop operations, but no one complains that the change has made shopping more complicated.
Similar ideas apply to taxes. Just as stores have provided increased convenience by carrying a wider variety of products, legislators have chosen to run many social programs and economic incentives through the tax code rather than as separate spending programs. Tax benefits–in the form of exemptions, exclusions, preferential rates, deferral rules, deductions, and credits–support everything from childcare to retirement saving, from healthcare to energy efficiency.
This avoids the logistical nightmare that would occur if people had to sign up separately for each federal tax subsidy. Imagine applying directly to the Department of Housing and Urban Development for a mortgage interest deduction, the Department of Treasury for a capital gains subsidy, and the Department of Health and Human Services for a child credit. Each department would likely have its own application and its own requirements for documentation, creating a tangled web of bureaucratic forms.
Making the IRS Form 1040 the one-stop way to apply for all these benefits complicates the act of tax filing but reduces the overall time burden placed on those trying to receive government benefits or incentives. In a similar vein, shopping at a superstore for a variety of goods may require more time at the store than it would take to do each individual errand, but it would still take less time than all that shopping at multiple locations.
The Free Application for Federal Student Aid (FAFSA) provides an example of the benefits of consolidation. Getting a student loan used to require families to collect their tax records and manually enter the data into separate forms. It was so complicated that many eligible students, especially those from low-income families, failed to complete the paperwork to receive financial aid.
In 2009, however, Congress and the Department of Education simplified the application by automatically transferring the required tax information from Treasury’s database onto the FAFSA that all colleges could use. This saved families time, reduced data-entry mistakes, and made the program more efficient and effective.
One may not like the existence of various government subsidies in the first place, but that is a different issue. Sometimes people throw up their hands in despair and argue for a vastly simplified flat tax with no deductions. But this would mean moving all social programs and economic incentives to the spending side of the budget, where they would have to be administered by numerous federal and state agencies. That would obliterate any net simplification benefit. Or it would mean that vast swaths of social and economic policy would be eliminated—a decision that should be examined through a lens broader than tax simplification.
Of course, there are many other reasons–some good and some bad–why taxes are complicated. But recognizing the subtle benefits of complicated taxes may help explain why the current system is simpler than any plausible alternative. In taxes, as in life and in running errands, the key question is “compared to what?”
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.