Taxes aren’t simple, all of us know that. And yet it seems that every election season, politicians offer to make them simple (my personal favorite is the pledge to make the tax return fit on a post-card). On the surface, this seems like a great idea. As a culture, we don’t like complexity or nuance, we want everything (especially finances) to be clean and transparent and ideally, to fit in a tweet. So why can’t we have a simple tax system?
The main reason that this is difficult to do is that if we were to simplify our taxes, we’d most likely end up with a huge tax increase. Most of the complexity on the 1040 comes from items that are designed to reduce your tax bill. If you try to fit the 1040 on a post-card, you’re going to have to eliminate a lot of tax benefits that people like.
Take a look at Schedule 1, for instance. There are 20 lines here that have data (others are just for subtotals or reserved lines). Five of those lines might cause your taxes to go up or down (Schedules C, D, E, F, and form 4797), while four would cause your taxes to go up (ex: tax refunds from last year, unemployment income). The other eleven are all items that lower your taxes (things like the HSA deduction, IRA contributions, Alimony paid, etc.).
Schedule 1 isn’t unique, either. In a medium to high complexity return, probably 70%+ of the lines on the return that have to be calculated or investigated are for deductions or credits.
We saw this problem first-hand two years ago when the Tax Cut and Jobs Act of 2017 (TCJA) was passed. The intent of this legislation was to simplify and lower taxes, but that’s really hard to do when 70% of the complexity comes from things that cause taxes to be lower (it would be a lot easier to make taxes simpler and higher).
One solution would be to lower the tax rates and eliminate many of the deductions. This is also really hard to do. Virtually every taxpayer has a deduction or credit that they really like, creating a built-in constituency to defend every line on the 1040.
Ultimately, we can probably have a simple tax code, or low taxes, but not both.