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Flat tax arguments12/24/2023 The Tax Reform Act of 1986 memorably promoted simplicity as one of the three core reasons for pursuing a system overhaul, the others being efficiency and fairness. Companies’ stated tax rates depend on their structure, and companies, too, have opportunities to change their effective rates. Individuals are taxed at different rates, and they can reduce their effective rate through myriad credits and deductions, which take time to itemize if they choose to do so. The US tax code is a master class in convolution. In this way, complexity undermines what tax incentives are purported to accomplish. Research by James Mahon and Chicago Booth’s Eric Zwick, and others, collectively indicates that the complexity leads individuals and companies to fail to take advantage of billions of dollars in offered breaks, many of them presumably intended to stimulate the economy. Hence companies and individuals will hire accountants to wade through the latest bill, interpret the new rules, offer guidance, and help work through the inevitable corrections and amendments.Īnd this comes at an economic cost. While simplicity is a stated goal, complexity wins the day. What happened? The same thing that always does, suggest researchers. “File Your Taxes on a Postcard? A GOP Promise Marked Undeliverable,” pronounced a New York Times headline shortly before President Trump signed the bill. Proposals to cut deductions for home mortgages and medical expenses, and tax credits for adoption and education, had been met by pushback. Instead, Democrats pointed to handwritten notes in the margins of the bill as a sign of a madcap construction process going on. But when the Senate passed a tax bill this past December, there was no postcard. Both the Bush and Obama administrations advocated for simplification, in reports, as have House Speaker Paul Ryan (Republican of Wisconsin) and Senator Elizabeth Warren (Democrat of Massachusetts). US Representative Kevin Brady (Republican of Texas) held up a prop, a mock-up of such a tax postcard, to drive the point home.Īnd simplifying the tax code ostensibly has bipartisan backing. When Republicans in Washington, DC, started talking up the latest round of tax reform, they said they were aiming for something so simple that 90 percent of US households could essentially file their taxes on a postcard.
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