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In his remarks to the Harvey Kennedy School in Cambridge, Massachusetts, the United States Inland Revenue Service (IRS) Commissioner Douglas H. Shulman said that one of the greatest impediments to effective tax policy implementation is complexity, and that, above all, most taxpayers want tax code simplicity.
His central message was that “making the tax code less complex is the single most important thing that could be done to improve taxpayer service and boost compliance”.
Taxpayers, Shulman stressed, “want to pay what they owe, understand what tax benefits they are entitled to, and not get tripped up by the system. However, today’s tax code is anything but simple. One year you might be eligible to claim a tax credit reducing what you owe. But the following year, the tax credit will expire, or there may be a change in your personal situation that will knock you out of the eligibility box.”
“Each tax benefit has its own series of requirements,” he added, “some of which overlap, but many of which do not. Many of the tax benefits are income limited or phased out at different income levels. Certain tax benefits must be coordinated with each other. Then start to layer on other complexities, including standard vs. itemized deductions, medical expenses, education expenses, charitable expenses, local taxes, and for many taxpayers, the Alternative Minimum Tax... the list goes on and on.”
“Complexity can lead people to not take advantage of tax benefits, largely credits and deductions, that Congress intended them to have, either because they don’t understand them or are afraid they may be ineligible. And in my experience, when laws or regulations are complex, it creates opportunities for those who want to game the system.”
Shulman pointed out that: “Perhaps the most telling indicator of taxpayer confusion over the code’s complexity is that today, 90% of individual taxpayers pay for professional tax preparation or tax software to prepare their tax returns. IRS research estimates that, over the past 10 years, the burden for the typical taxpayer has increased by about 20% and would likely be even more if they had to prepare returns themselves without any aids or tools. Moreover, we estimate individual taxpayers and businesses spend more than 7bn hours each year complying with filing requirements.”
While the Joint Committee on Taxation (JCT) found that between 1980 and 2010, the number of tax expenditures in the code grew from slightly less than 100 to almost 250, and that the IRS has counted that there have been 3,000 legislative changes to the tax code since 2000, he provided some ideas on how to deal with some of the difficult problems that the IRS faces in interacting with taxpayers.
Those ideas ranged, he said, from giving common or standardized definitions in the tax code to eliminating multiple credits and deductions promoting the same policy goal. For example, he recorded that the Senate Finance Committee had listed more than 15 provisions to assist with the rising costs of higher education.
Then he considered that Congress should “try to resist the temptation to enact short-term provisions that may expire but are then extended. This has an enormous unsettling effect on both clarity and stability. Last year, the JCT identified more than 130 tax provisions that were set to expire at the end of 2010, with another 65 due to sunset at the end of 2011.”
Finally, Shulman requested that the effective dates of tax changes should be set far enough ahead to allow implementation to go smoothly and to create a real incentive – so that the IRS could educate the public, set up customer service operations, and put in place the appropriate compliance systems.
Unfortunately, while each tax credit or incentive may make sense by itself, he concluded that “complexity grows incrementally with every legislative session. The 15,000 plus changes to the tax code since 1986 are anything but elegant, anything but simple, and anything but clear to the average taxpayer. A simpler system could better further policy goals by having a more involved and engaged taxpayer base that would take advantage of incentives to which they are entitled and thereby improve their economic position.”
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