The U.S. tax code is overly complex, with multiple sets of rules and programs that make taxpaying confusing and time-consuming, costing Americans tens of billions of dollars annually. Wholesale structural reforms are needed, but smaller changes can also make taxpaying easier for millions of Americans.
Politicians on both sides of the aisle often get carried away with designing new or expanded tax programs without considering what is already in the tax code and how the whole system works when families file their taxes. As a result, the United States has at least six different sets of rules on how a child might qualify a family for tax benefits, 15 different tax programs targeted at higher education, 18 different tax-advantaged savings accounts, and 14 different deductions for people who itemize. The task of merely describing how these tax programs work is the subject of hundreds of pages of IRS instructions and countless inscrutable forms and worksheets.
Republicans are rightly worried about the $80 billion Congress has authorized for increased IRS enforcement and modernization. However, the IRS funding conversation misses the critical fact that the inscrutability of the U.S. tax code is the fault of Congress, not the IRS. In a recent Cato policy analysis, Joseph Bishop-Henchman has 10 recommendations to reform the IRS and protect taxpayers from aggressive IRS enforcement. His most important recommendation is to “dramatically simplify federal tax laws.”
Toward this end, my new Cato Brief highlights four areas where the tax code can get particularly complicated for many families.
1. Harmonize Definitions for Child and Dependent Benefits
There are at least six different sets of rules for how a child might qualify their guardian for tax benefits. Across these different provisions, eligibility requirements differ by age thresholds, Social Security number requirements, child residency and support requirements, and definitions of earned income.
There are many ways to go about reforming these provisions. The most straightforward reform would eliminate each of the subsidies, many of which have economic and budgetary costs beyond the added tax filing complexity. Short of more comprehensive reforms, simply aligning common eligibility requirements across the different provisions would go a long way to simplifying the tax code. For example, Congress could create single definitions for “qualifying child” and “qualifying dependent” that would make eligibility requirements consistent for each child and dependent tax benefit.
2. Consolidate Education Credits
There are as many as 15 programs that subsidize and distort the education system. Given all the other ways the government subsidizes education, the cleanest answer is to entirely remove the tax code from the education system. In 2020, the federal government directly spent almost $30 billion on degree-granting postsecondary institutions.
Short of repealing these tax programs, simple changes would make complying with our education tax laws more straightforward. The American opportunity tax credit, lifetime learning credit, student loan interest deduction, and benefits for full-time students younger than 24 could be consolidated into a single nonrefundable credit with one set of rules that is simple and easy to follow. For example, the credit could be 25 percent of up to $10,000 of current-law lifetime learning credit expenses plus student loan interest with current-law income limits.
3. Simplify Savings Programs
There are 18 different retirement and education savings accounts, each with its own eligibility rules, income and contribution thresholds, early withdrawal penalties, and employer requirements. These accounts should be consolidated.
Congress should also create a Universal Savings Account. USAs operate like retirement accounts but without restrictions on how you spend the funds. Without withdrawal restrictions, taxpayers, instead of politicians, get to decide how to spend their savings.
4. Eliminate Itemized Deductions
Taxpayers can use the standard deduction or a list of 14 itemized deductions for specific expenses, such as mortgage interest, state and local taxes, and charitable giving. The 2017 tax cuts moved 29 million taxpayers from the more complicated itemized system to the simpler standard deduction. Congress should finish the job by moving the remaining 10 percent of itemizing taxpayers to the standard deduction. Congress should use any increased revenue to lower top‐marginal tax rates.
It has become a trope to say that the U.S. tax code is too complicated. But it’s true, especially for people with special circumstances, such as lower-income families with kids and education expenses. The U.S. tax code is too complex, and structural reforms are needed. However, short of a once‐in‐a‐generation reform, there are several relatively simple ways to streamline the tax code that could make taxpaying easier for tens of millions of Americans.
