Weinstein: Simplification Should Be First Priority of Tax Reform

The tax reform debate is heating up and many groups are weighing in on what tax provisions should be kept and what the broad revenue and distributional goals of tax reform should be. But Paul Weinstein of the Progressive Policy Institute, a former senior advisor to the Fiscal Commission reminds in a new report that lawmakers should not forget about the opportunity to make the code drastically simpler for taxpayers.

In the paper, Simplify, Simplify, Simplify: The First Principle of Tax Reform, Weinstein argues that focusing on simplification will in turn achieve many other policy goals that are important to lawmakers and prevent special interest groups from disrupting the process. In her annual report to Congress, the IRS Taxpayer Advocate Nina Olson estimated that businesses and individuals spent 6.1 billion hours complying with the tax system. 60 percent relied on paid preparers, while another 30 percent used a tax filing software. Besides the tax code's complexity costing taxpayers their time, tax expenditures also lead to substantial forgone revenue, estimated at $1.3 trillion in 2013 for both individuals and corporations.

Some have suggested return-free filing, where the government fills out the tax form for taxpayers, as a way to make the tax filing process simpler. However, Weinstein points out that this move does not address the underlying complexity and opacity of the code, may be very administratively difficult, and presents a conflict of interest with tax authorities who may view maximizing revenue as the goal over accuracy.

Therefore, Weinstein focuses on simplification of the code itself first and foremost, eliminating or redesigning many of the tax preferences currently in place. Weinstein recommends achieving six goals with comprehensive tax reform:

  1. Promote economic efficiency and growth
  2. Reduce the number of tax incentives to lower rates and rebuild the nation's revenue base
  3. Maintain progressivity
  4. Reduce errors and avoidance
  5. Better align state and federal rules

There are many benefits that can come with tax reform: the opportunity to raise needed revenue, lower marginal rates and promote growth, and better target tax preferences to benefit those who need them. But focusing too much on the distributional effect or marginal rates distracts from the benefit of making the code simpler and more efficient. Concludes Weinstein:

Simplicity and its many benefits are often overlooked in the tax reform debate, which typically centers on economic and redistributive issues. Simplification should be considered a goal of equal importance and should be made a fundamental test of comprehensive tax reform. A democracy should strive to make tax policy transparent and user-friendly to ordinary citizens, so that it becomes an instrument for promoting common prosperity rather than special privilege.

Fortunately, the good news is that policymakers do not have to choose among economic growth, progressivity, and simplification when it comes to tax reform. There are a number of plans that would incorporate all three principles and would put our nation on a path to prosperity for everyone, not just a select few. There is a moment of opportunity in this Congress and this Administration to do great good in making our tax system more rational and understandable and effective. We need to seize the moment.

Click here to read the full report.