Common-Sense Tax Reform

This report addresses the practical considerations for simplifying America's income tax system. The report discusses how the current system works and interacts with other tax regimes -- state, local, and international -- an understanding reformers need to avoid creating taxes and complexities at other levels. The author describes how the failure to integrate the corporate and personal tax systems resulted in the growth of pass through entities accompanied by the growth in number and complexity of individual tax returns. Also discussed is how the personal income tax reforms of the past -- fewer individuals paying income taxes -- failed to simplify the tax system, contributed to the inability of the tax system to solve social issues, and increased the use of refundable tax credits with their problems of delivery and fraud. The author points out how e-filing, the primary government cost-cutting solution, has had the unintended result of increasing the ease and speed of tax refund fraud. The author describes how tax simplification can evolve out of the current system through proposals such as allowing dividends to be deducted by corporations, reducing the rate structures from four to one, introducing a return-free system for a majority of America's taxpayers through pay as you earn (PAYE) or an IRS-prepared tax return, and eliminating deductions and credits by solving social problems through direct programs. The author also points out how some reform proposals such as credits rather than deductions can cause wage-withholding complexities for taxpayers. The author argues that measurements of success of tax reforms as they unfold must be 1) the number of total tax returns -- federal, state, and international, 2) the impact of reform on other tax systems, and 3) the economic impact of reform on governments at all levels as well as on taxpayers.