I know there are other threads this discussion could go in, but I think the topic of tax simplification is important enough to warrant its own discussion separate from discussion of income inequality or the campaign process.
In looking over these forums, I have seen a number of people arguing that one clear way to improve America would be tax reform and simplification. As a corporate tax and employee benefits attorney in private practice at a major US law firm who recently completed pro bono work on a draft federal tax credit for certain low income individuals, I just wanted to make it clear how difficult that simplification can be. This is not intended to be a discussion about whether or not tax simplification should occur; instead I want to focus on why it is so difficult to accomplish it.
For purposes of this discussion, I will assume that someone in favor of tax simplification (i) generally supports uniform effective tax rates for similarly situated people (i.e., that people earning similar incomes should pay taxes at the same rate, instead of being able to lower their effective rates through credits and structuring) and (ii) is not concerned with the (extremely complex) transition issues in going from the current tax system to a new system.
If we stick with an income tax like the current federal tax system, the first issue that we face is defining income. While this might seem simple (just look at what people earn or receive) there are a number of key questions that we face, such as if people should be taxed on cash or cash plus property (including the receipt of non-cash services such as employer provided healthcare). If we answer by saying we will only tax cash, then people who can afford to be less liquid will take compensation as property. If we say that both cash and property should be taxed, then we may require people to sell property they would not have or to decline things like health care, to afford to pay their taxes. There are countless other questions around the definition of income, but this should illustrate that there is no easy answer.
Questions like the above are not easy to answer, but they are also not impossible. But my sense is that when people talk about tax simplification, they are largely concerned with the benefits that corporations and high income individuals get through tax “loopholes.” While there are certainly some sections of the tax code that seem to fit this description (such as so-called rifleshot provisions which are only intended to apply to a single taxpayer in a single year), a lot of these “loopholes” actually serve important purposes. For example, people often say there is abuse around the like-kind exchange rules (rules which allow two taxpayers to exchange similar property without paying tax until they sell the property they receive) and while abuse is possible, without the rules there would be no way for these exchanges to happen, since both parties would have to sell the property they exchange to cover their taxes. A more fundamental and important “loophole” is the section of the code allowing for tax free reorganizations of businesses. Without tax free reorganizations, companies would not be able to change their corporate form or merge with other companies without triggering extremely high tax bills. On the one hand, these rules are enormously complex, and navigating them in connection with a single merger or acquisition costs tens or hundreds of thousands of dollars in legal and accounting fees. But if we did not have these complex rules in our simplified tax code, then the tax consequences of these deals would distort the market, and cause countless deals which are sensible apart from taxes to be irrational.
A more fulsome discussion of the tax code or tax policy is beyond the scope of a forum thread, but I wanted to illustrate some of the complexities in tax simplification. The code is complicated (the code plus regulations literally takes up a full shelf in my office) but that complexity arose in response to questions that arose in trying to apply the tax code to circumstances that the original authors could not foresee. This does not mean that the code cannot be simplified, but I think it is important to realize that realistic simplification would most likely mean that I would reclaim half a shelf in my office, and some people would pay more in taxes. Expecting more than that (and every tax reform in US history has mostly resulted in changing some sections, while retaining and renumbering most of the code that existed prior to reform) is just not realistic in my opinion, regardless of what any politician or pundit who does not understand how the tax code operates may say.
I'm not sure how much time I will have to participate in any discussion that takes place, but I will be happy to answer any questions people have about the realities of the tax code and tax policy, and to weigh in on the technical meaning of any of the simplification proposals that have been bandied about. Thanks for reading!
Edit: Deleted reference to consumption tax. This is a thread about tax simplification, not the merits of a consumption tax vs an income tax.