NCPA - National Center for Policy Analysis


April 14, 2009

Every year taxpayers and elected officials complain about the tax law's complexity.  But despite the exasperation, no significant simplification has occurred since the landmark Tax Reform Act of 1986. To the contrary, each new tax proposal is layered onto the existing code, rendering it more complex with every new act, says Nina Olson, the national taxpayer advocate at the Internal Revenue Service (IRS).

This complexity has lead to a series of perverse results, says Olson:

  • One significant problem is the ambiguity concerning tax breaks meant to encourage taxpayers to save for education and retirement.
  • Another muddy area is the earned income tax credit (EITC), a refundable tax credit for the working poor; the current complexity of eligibility and substantiation requirements leads to large numbers of improper claims by taxpayers and to denials by the IRS.
  • Small businesses face a patchwork set of rules that keep businesses and the IRS battling each other for years with no obvious "correct" answer.
  • And then there is the nightmare of the Alternative Minimum Tax that requires taxpayers to compute their taxes twice and then pay the higher of the two amounts.

In developing a comprehensive tax reform blueprint, Olson recommends that emphasis be given to six core principles:

  • The tax system should not be so complex as to create traps for the unwary.
  • Tax laws should be simple enough so that most taxpayers can prepare their own returns on one single form.
  • Should anticipate the largest areas of noncompliance and minimize the opportunities for such noncompliance.
  • Should provide a few choices, since choices are confusing and can lead to taxpayer error.
  • Where the tax laws provide for refundable credits, they should be designed in a way that is minimally burdensome both for the taxpayers claiming the credits and for the IRS in administering them.
  • The tax system should incorporate a periodic review of the tax code.

Source: Nina E. Olson, "We Still Need a Simpler Tax Code," Wall Street Journal, April 10, 2009

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