Question

A strong desire continues in the business community for a tax system that is simpler, more competitive, and conducive to economic growth. Discuss at least two suggestions to simplify the tax law. Do you think these suggestions will be effective? Why or why not?

Answer 1

• The notion that taxes should be simpler is one of the very few propositions in tax policy that generates universal agreement. The fundamental paradox of tax simplification is that, although everyone thinks taxes should be simpler, almost every year tax policy becomes more complex. This suggests that pleas for simplification need to be buttressed by an understanding of the causes of complexity and the likely outcome of simplification efforts.

• Simpler taxes have numerous benefits. They would reduce taxpayers’ costs of complying with the tax system in terms of time, money, and mental anguish. They would likely raise the use of tax subsidies-say, for education-reduce unintentional tax evasion, and increase the likelihood that taxpayers would see the tax system as fair.

• But simpler taxes also have costs. In particular, they reduce the ability of policy makers to achieve other goals of tax policy. Features of the tax code that are designed increase tax equity, police intentional tax evasion, or encourage some particular activity often increase complexity.

•These considerations of the costs and benefits of simplification have several implications for thinking about tax complexity:

—Tax complexity arises in large part as the result of a trade-off between simplicity and other goals.

—As a result, the fundamental issue is not the overall level of complexity; rather it is whether particular tax provisions, tax systems (or alternative means of providing government services, such as spending or regulations) provide good value for the complexity they create. This depends on the magnitude and incidence of the costs and benefits of complexity, where the benefits include the extent to which complexity aids in achieving other policy goals.

—Moreoever, the factors that generate complex tax systems-policy trade-offs, politics, and taxpayers’ desire to reduce their own tax burdens-are not features of particular tax policies per se. They will likely remain in force even if the tax system were reformed or replaced. As a result, an analysis of the extent to which policy changes can affect tax complexity should incorporate these factors.

two suggestions to simplify the tax law :-

• Consolidate tax benefits for education: Families with students in college may qualify for multiple tax benefits to defray educational expenses, but often may claim only one of them. For example, a family may be able to claim either the American opportunity credit or the lifetime learning credit, but not both, for the same student. If the family supports more than one student, it may claim one credit for one student and the other for the second student. Determining which alternative is best requires multiple calculations and can conflict with other tax benefits for education, such as Coverdell savings accounts and 529 savings plans. Combining or at least coordinating the various tax benefits would help taxpayers both determine their eligibility for benefits and calculate them.

• Coordinate tax benefits for dependent care: Taxpayers may reduce the net cost of dependent care through the child and dependent care credit and through flexible spending accounts set up by their employers. They may, however, use only one of the two options for a specific expense, which can make both planning how to finance childcare and completing tax returns difficult. Coordinating the two benefits or combining them into a single benefit would address both problems.