When I hear commentary about tax reform – which seems to be nonstop these days – I think about the people for who simpler taxes would make a big difference. Understanding the impact of abstract changes on real people can really bring to life what simplification can mean. For example, my colleague recently met a person named Deborah – Dee for short – whose situation helps illustrate the potential benefits of tax simplification.
Dee is a nurse tech and, according to my colleague, has a true gift for patient care. Dee is also what I think of as an average taxpayer. She works two jobs, one as a W-2 employee at the hospital and one as a contractor for a home health care agency. She wants to continue her educational training to become a certified nursing assistant, and then a registered nurse, but isn’t sure how she’d pay for it. Dee is also mom to an energetic 4-year old who adores the pre-school program at which she’s enrolled.
Simplification of our complex tax code could empower individuals, like Dee, to more easily understand her taxes, protect taxpayers by mitigating fraud, and strengthen our tax administration system by improving fairness and reducing the compliance burden on individuals, families, and small businesses.
For starters, simplification could allow individuals like Dee to better understand her tax situation and eligibility for benefits and, ultimately, enable her to make better and more informed financial decisions.
The tax code includes incentives to support education, childcare, saving for health care expenses, retirement savings, and many other important goals. But for Dee, and others like her, claiming the Earned Income Tax Credit alone is extraordinarily complex. Qualification, especially for households like Dee’s with a non-traditional family structure, is extremely difficult to understand and compliance is overly burdensome. As a result, millions of EITC-eligible filers fail to claim the credit each year. For incentives to support the public policy goals as intended, people need to understand them – something that has become harder to do as the tax code has grown increasingly complex.
Tax simplification reform could also mitigate the risk of fraud. A less complex system makes it easier for the IRS and states to identify fraudulent activity and stop bad guys from stealing refund payments. Preventing refund fraud from happening in the first place is the best way to protect taxpayers like Dee who depend on the annual tax refunds to catch up on bills and provide some cushion in their budgets.
While the IRS, states and the tax preparation industry have together made important gains toward protecting deserving taxpayers, there is more we can do. Tax reform should continue to enhance security measures and include principles-based solutions that will protect taxpayers from fraudulent activity.
A third benefit of reforming our complex tax code is that it could strengthen our tax administration system so that it works for everyone. Voluntary tax compliance is vitally important to our system of self-government. A simpler tax code could eliminate some of the common hurdles – such as fear, frustration or lack of confidence – that lead to failure to file a tax return.
And for the major of taxpayers who want to do the right thing, complexity causes inadvertent errors, shortchanging those who overpay and subjecting those who underpay to potential penalties and interest payments. Complexity can also undermine faith in the tax system as citizens wonder whether their neighbors are paying the same taxes they have to pay. Tax simplification reform could reduce improper payments that undermine the integrity of the system, improve the perceived fairness of the system, and reduce the burdens of tax compliance on individuals, families, and small businesses.
As the bustle around tax reform grows in Congress, I hope that we can all keep focused on the crucial need and important benefits to simplifying our incredibly complicated and lengthy tax code. Its complexity threatens to undermine important national economic policy objectives for our country, starting with better financial health for Dee and her family, and the many taxpayers like her. Enacting any reforms will not be an easy task but, for all the Dees out there, it is worth the effort.