This blog post is part of a series dedicated to analyzing the impact of the Tax Cuts and Jobs Act. Click here to see all of the blogs in the #TCJANowWhat series.
We’ve been promised a postcard-size tax return. There are even pictures of GOP reps holding what appears to be the supposed postcard. The GOP used this “postcard campaign” to promote its promise that the Tax Cuts and Jobs Act (TCJA) will significantly simplify the Internal Revenue Code and, as a consequence, the tax filing process for everyone.
The idea of “simplification” is probably one of the least
controversial tax policy ideas. You will be hard-pressed to find an elected
official, from either side of the aisle, or any expert, not calling for simplifying
the US tax code. It was one goal of the TCJA that faced no opposition.
So how did the TCJA do on simplification? Did the fact that we
all agreed that simplification is “good” help? Is the code simpler? Can we file
on a postcard? It is probably still too soon after the reform to have
meaningful data (we have only had two filing seasons — one and a half if you
take into account automatic extensions), but the anecdotal data do not seem
promising.
To begin, tax preparation professionals have been complaining that the 2018 filing season was one of the toughest filing seasons they can remember. Revenues earned by the tax preparation industry — which one would expect to decline in the face of a simple tax system — have continued their steady climb even after the reform. Two initial assessments, one from a right-leaning think tank and another from, well, also a right-leaning think tank, find, at best, a modest improvement in tax filing burdens compared with pre-reform compliance burdens. Both find that taxpayers spent about eight billion hours on tax compliance in 2019 (compared with about six billion hours in 2016). The number of IRS forms increased by 13 percent (a second consecutive year of a double-digit increase). For the 2018 tax year, there were 1,337 tax forms (!), compared with 1,186 for the 2017 tax year — the last pre-reform tax year. Even by the favorite measure of tax complexity frequently (and wrongly) advanced by Paul Ryan — the number of tax pages in the code — we did not do well. The number of pages actually increased (by one page!) after the enactment of the TCJA.
So how did we end up here? With the one uncontroversial goal
of tax reform appearing (pending some real data) to be so spectacularly
underachieved?
One of the main reasons, in my mind, is the almost universal focus on doubling the standard deduction as a mean of simplicity. It has been estimated that doubling the standard deduction would reduce the number of filers itemizing their deduction from 46.5 million in 2017 to just over 18 million.
There is some difficulty, however, with the assumption that less itemizers necessarily means less tax compliance burden. First, about 90 percent of taxpayers file their taxes online, many using commercial tax preparation software. To a large extent, the questions one has to answer for the software to determine whether one should itemize deductions are the same questions as before the reform. Only the answers are different. (It is less likely the software will tell you to itemize compared to before the reform.) Even if taxpayers who itemized under pre-TCJA law do not itemize now, they probably are spending a similar amount of time trying to figure out if they should itemize.
Moreover, complex provisions that imposed tax compliance
burden even on non-itemizers before the reform remained complex (for example, the
earned income tax credit). Many taxpayers who already took standard deductions saw
no simplification as a result of the reform.
Finally, even if the doubling of the standard deduction
offered real simplicity benefits, many of these benefits were offset by the
introduction of new code provisions that apply to low-income taxpayers. All low-income
business owners may now try to take advantage of the 20 percent business income
deduction prescribed by section 199A. This provision is fantastically complex.
And to make matters worse, it applies regardless if one itemizes or takes the
standard deduction. So business owners who take standard deductions may still
have to deal with the arcane provisions of Section 199A.
Another problem with the reform that seems to have added complexity is the GOP’s obsession with change for the sake of change. I speak, of course, of the revised 1040 form (the so-called “postcard”). It is not at all clear what tax policy purpose this has served. First, as mentioned, most people file online and care little about the appearance of the form on paper. From this perspective, redesigning the form seems to be nothing more than a waste of administrative IRS time. Second, the design itself was rightfully decried by tax professionals. In an attempt to squeeze as much as possible onto as small as possible space, the IRS removed much of the familiar 1040 forms but had to create six new schedules to accompany the redesigned form. The new form is shorter, but less intuitive, and requires multiple other new forms to complete. Even the retiring taxpayer advocate, Nina Olson, criticized the new form on these grounds.
All the above refers only to individual income taxation. Don’t even get me started on the business side of things. Our new international tax system may be a slight substantive improvement compared with the old one, but it is significantly more complicated (just figuring out the new abbreviations is a taxing task: BEAT, GILTI, FDII, QBAI, to name a few). We added a multitude of new provisions, without really riding ourselves of any of the old ones. It therefore comes as no surprise that one sector that seems to flourish post reform is that of tax lawyers and tax accountants.
Should we care? In the expansive debate about what makes
“good” tax policy, efficiency and equity usually take center stage.
Administration and complexity seem to be an afterthought, mostly because people
agree simpler is usually better. But the complicity of the system should not be
overlooked. It is a self-contained normative component of a tax system. Not
only does a complex system invite unnecessary costs as a result of compliance
burden and reporting errors, it also exacerbates other maleficences of the law.
Complexity means more opportunity for tax planning, which in turn is likely to
invite unwanted behavioral distortions. And the taxpayers who can take
advantage of the planning opportunities offered by complexity are likely to be
high net worth taxpayers.
Thus, complexity is also likely to hurt both the efficiency
and the fairness of a tax system. I wish legislators spent some effort focusing
on simplifying the tax system, simply for the sake of simplifying the tax
system. The TCJA was a missed opportunity in this regard.
Omri Marian is a tax law professor and the academic director of the Graduate Tax Program at the University of California, Irvine School of Law.
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