Lip service
The president’s tax plan is anything but simple
In advance of the 100th day of his administration, President Donald Trump rushed to unveil the broad outlines of a tax plan. The plan has been criticized on a number of grounds, not the least of which is its lack of detail. But Mr. Trump has nonetheless been given credit — including on the editorial page of this paper — for his apparent effort to simplify our tax system. This credit is undeserved.
As someone who teaches tax law, I can certainly attest to the complexity of our tax system. After all, I spend my days trying to make sense of that complexity for my students. There is no question that there are areas in which our tax system (and the task of my students in trying to understand it) can be simplified; however, given the intricacies of our society and our economy, there is less room for simplification than one might initially expect.
Reducing the number of tax brackets is a nod to simplification that politicians, including Mr. Trump, often make. But reducing the number of tax brackets is a meaningless gesture because it does nothing to make the annual ritual of tax return filing any easier. It is the IRS — not taxpayers — which contends with the complexities created by the graduated rate schedule. Most taxpayers don’t experience the complexity inherent in the graduated rate schedule because the IRS takes care of the math for them through the tax tables included annually in the tax return instructions. Even for taxpayers at the very top end of the income scale, the IRS includes a worksheet that reduces the math to an absolute minimum. Thus, whether there are three, seven, 12, or 20 rate brackets simply does not make filing any more or less difficult for taxpayers as a practical matter.
Mr. Trump has also proposed to increase the standard deduction in order to reduce the number of taxpayers who itemize. Deductions can be complicated and convoluted, and they can often require a good deal of recordkeeping. But what doesn’t get mentioned in coverage of Mr. Trump’s tax plan is the fact that only about one-third of all taxpayers itemize even now. What this means is that the existing standard deduction is generous enough that about two-thirds of taxpayers already don’t itemize. Increasing the standard deduction would further decrease the number of people who itemize, but it will not have a significant impact on reducing complexity when the vast majority of taxpayers already don’t experience the complexity associated with itemizing deductions.
What’s more, the notion that Mr. Trump’s tax plan is aimed at simplifying the tax system is belied by his proposal to reduce the rate of tax on income from passthrough entities to less than half the top rate on ordinary income. If there is one thing that any student of the tax laws can tell you, it is that the greatest source of unneeded complexity in our tax system lies in drawing arbitrary distinctions between different types of income. Under our current tax laws, the distinction drawn between “ordinary” income and “capital gains” is the source of truly mindnumbing levels of complexity in our tax system. Indeed, some of the most convoluted provisions in our tax laws are designed to do nothing more than respond to the ingenuity of taxpayers who have spent their time trying to convert ordinary income into capital gain, just so that they can take advantage of the lower capital gain rates.
Little better can be expected of drawing a distinction between income earned from pass-through entities and that earned by taxpayers directly. This distinction is little more than an invitation to taxpayers to invent new means of abusing the tax laws — and for Congress and the IRS to spend their days attempting to keep a step ahead of taxpayers by creating complicated rules designed to stave off exploitation of this loophole. This may increase job opportunities for the tax professionals who are hired to exploit such loopholes, but it will do absolutely nothing to make our tax laws simpler. If anything, this proposal will unnecessarily multiply the complexity of our already knotty tax system, simply to give a break to those with the means to hire expensive tax advisers to help them artificially lower their tax bills.
Mr. Trump’s tax plan may pay lip service to simplification but, even in the broad outlines that have now been offered, it promises only to make our tax system even more complex than it already is.