Tax System Custom Essay

“The resources required to keep records and file returns already cost American families an additional 10 to 20 percent over what they actually pay in income taxes…..Targeted tax subsidies undermine citizens’ confidence in the fairness of the system by treating similar activities differently.  Subsidies that are reduced or completely phased out as income rises create complicated rules and reduce incentives to work and invest more.  Although tax credits reduce payments and make the government appear smaller, this is an illusion.  The intrusiveness of government is just buried in the tax code rather than displayed obviously as a spending program.”

William G. Gale, “Make it Less Complicated to Pay Taxes,” The Los Angeles Times, February 21, 2000.

Simplicity and Enforceability:  How complicated is our tax system?   Chapter 5 of Slemrod and Bakija

Ideas for simplification.  Explain and discuss two.

1.      Make fewer distinctions across economic activities and personal characteristics.  Taxes should be imposed on a broad income base at lower rates that do not vary across sources of income or types of expenditure.

2.      Relieve between 40 and 50 million households of the need to file tax returns.  With small changes in withholding rules, this could be done for households that do not take itemized deductions and have income only from wages, Social Security, IRAs, pensions, unemployment insurance, interest and dividends.

3.      Cut the top rate to 30 percent and tax capital gains as ordinary income.  Lowering the top rate would raise economic activity and reduce tax avoidance.  Eliminating the differential between capital gains and other income would close down a significant amount of sheltering activity. 

4.      Raise the standard deduction significantly.  This would reduce the number of households that have to itemize their deductions.

5.      Remove the phase-outs on itemized deductions and personal exemptions that affect high-income taxpayers.  These are needless complications that raise little revenue. 

6.      Make the tax credits for children, child care, education and adoption completely refundable, so that low-income households get the full value of the credit even if their income tax liability is zero.  Eliminate the phase-out of these credits as income rises. 

7.      Consolidate and simplify all IRAs and related plans into one account with simple and clear contribution and withdrawal rules.