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The United States National Taxpayer Advocate Nina E Olson, has once again emphasized the need for simplification of the US tax code in her annual report to Congress.
Following an analysis of Internal Revenue Service data, the NTA concluded that individual and business taxpayers in the US collectively spend around six billion hours per year complying with the tax code's requirements, a figure which does not include the "millions of additional hours" likely spent on responding to IRS audits and notices.
"If tax compliance were an industry, it would be one of the largest in the United States," the report says. "To consume six billion hours, the 'tax industry' requires the equivalent of three million full-time workers."
"It has now been more than 30 years since Congress enacted the Tax Reform Act of 1986 to substantially simplify the tax code," the report adds, "and since that time, the code has grown more complex by the year, as evidenced by the fact that Congress has made more than 5,900 changes to the code – an average of more than one a day – just since 2001. The compliance burdens the tax code imposes on taxpayers and the IRS alike are overwhelming, and we urge Congress to act this year to vastly simplify it."
According to the report, the tax code contains more than 200 tax deductions, credits, exclusions, and similar tax breaks, known collectively as "tax expenditures." These tax expenditures have been estimated by the Treasury Department to total USD1.42 trillion, or more than Congress appropriated to fund the entire federal government.
However, the report also acknowledges that simplifying the tax code will require "difficult policy trade-offs" as the most costly tax expenditures benefit large numbers of taxpayers.
"The elimination of these benefits could have undesirable effects – less health insurance, less retirement savings, smaller charitable contributions, and less home ownership," the NAT said.
Nevertheless, it is argued in the report that taxpayers would be likely to support comprehensive tax simplification if they are included in an "informed dialogue."
"If tax reform is enacted on a revenue-neutral basis, the average taxpayer's bill will not go up, and taxpayers will be much happier to have a simpler and more transparent system. They will understand how much tax they are paying, they will understand how their tax is computed, and many will save time and money because they no longer will have to pay fees to have their returns prepared."
However, Olson stressed that she is not recommending the elimination of all tax expenditures. Rather, the report proposes that Congress should use a "zero-based budgeting" approach to tax reform.
"The starting point for discussion would be a tax code without any exclusions or reductions in income or tax," the report says. "A tax break or IRS-administered social program would be added back only if lawmakers decide, on balance, that the public policy benefits of running the provision or program through the tax code outweigh the tax complexity burden the provision creates for taxpayers and the IRS."
The report highlights several areas of complexity that it recommends Congress address, either as part of comprehensive tax simplification or on a stand-alone basis. They include: repealing the Alternative Minimum Tax for individuals; consolidating the family status provisions in the tax code; consolidating at least 12 incentives to save or spend for education; consolidating at least 15 incentives to save for retirement; simplifying worker classification determinations to minimize employee-versus-independent-contract disputes; eliminating or reducing procedural incentives to enact tax provisions that expire and require periodic renewal (sunsets); eliminating or reducing the gradual phase-out of tax benefits as income rises; and streamlining the more than 170 civil penalties contained in the tax code.
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