Tuesday, April 25, 2017

Income Tax Simplicity

As a management consultant specializing in strategic simplicity, I know that one of the biggest fields that is plagued by complexity is politics / government.

And, within government, much of the complexity damage is caused by the Federal tax code.  If the purpose of the tax code was primarily to collect revenue, then it could easily be made more simpler.

Instead, politicians derive their power from tax complexity.  It allows them to exploit a giant (and lucrative) ecosystem of lobbyists who press for the opening of new loopholes–as well as avoiding the closing of existing ones.

According to Steve Forbes, editor-in-chief of Forbes Magazine (and former presidential candidate who ran on a flat tax),  U.S. citizens spent more than $400 billion a year complying with the federal income tax code.  We also spend more than 6 billion hours a year filling out tax forms.

Nina Olsen, who has served as the national tax payer advocate since 2001, agrees with me that, not only is complexity the #1 serious issue with taxation, but that creeping complexity is something that requires constant vigilance.

In a recent Wall Street Journal op-ed entitled "Complexity Is the Root of All Evil (at Least in the Tax Code)", she made the case that Congress needs to focus on simplifying our monstrous tax code.  She stated "If I had to distill everything I've learned into one sentence, it would be this: The root of all evil is the complexity of the tax code."

She offers six core principles that she believes Congress should follow in overhauling the tax code:

1. The tax system should not be so complex as to create traps for the unwary.

2. The tax laws should be simple enough so that most Americans can prepare their own tax returns on a single page, and simple enough so that the IRS's customer service reps can easily answer questions over the phone.

3. The laws should anticipate the largest areas of noncompliance and minimize them.

4. Tax laws should provide some choices, but not too many so as to confuse tax payers–or lead to errors.

5. When tax laws provide for refundable tax credits, they must make it easy to claim and administer.

6. There should be a required periodic review of the tax code to serve as a sanity check against creeping complexity.