Everyone seems to agree our current system for paying Income Taxes is much too complicated. It takes too much time and costs too much money – both for the taxpayer and employees of the Internal Revenue Service. Here are a few modest proposals for simplifying our taxes for both taxpayers and the IRS.
- Codify the taxation of capital gains:
With eight different tax rates on capital gains, and three different worksheets, it is far too complicated. It would be easier for the tax payer to calculate their tax on capital gains if we allowed fixed percentage exclusions for long-term gains and applied regular tax rates to everything else.
- Streamline education tax benefits:
If your child is in college, you may qualify for multiple tax benefits, but often only claim only one. A family can claim either the HOPE credit or the lifetime learning credit, but not both. If your family has more than one student, it can split the credits between the students. The calculations are complex and can negatively impact other tax benefits, such as savings accounts and 529 savings plans. By combining the various tax benefits we could facilitate the taxpayer process for both determining their eligibility and to calculating their taxes.
- Repeal the alternative minimum tax:
The alternative minimum tax (AMT) was designed to assure high income individuals paid something in taxes, but it now affects more than 4 million households, families who already pay significant taxes but are far from the top, income-wise. Congress revisits the AMT every year to “patch” the process and keep it from affecting millions more. Repealing the AMT and creating a new tax bracket for the wealthy would simplify the tax process and eliminate the patches.
- Eliminate taxes on Social Security benefits:
Single Social Security beneficiaries with adjusted income below $25,000 ($32,000 for couples) pay no tax on their benefits. There should be no increase in taxes for married couples. If fact, a fixed fraction of benefits taxable would make tax filing easier for them. Eliminating taxes on Social Security would make it even simpler.
- Combine tax benefits for dependent care:
Currently, both the child and dependent care credit and flexible spending accounts set up by employers are options taxpayers may utilize to reduce their costs for dependent care. Of course, the taxpayer can only use one of the two options. Combining the two into a single benefit would address both problems while helping to streamline the process.
- Aggregate tax incentives for retirement savings:
Sometimes, too many choices are not desirable. Current plans include deductible, nondeductible, Roth Individual Retirement Accounts, Roth 401(k)s, and traditional employer-based pensions. Each option has unique requirements, income limits, and tax benefits. Aggregating all existing options into fewer, or a single alternative – and setting income limits for all would simplify tax filing and reduce administrative costs.
- Consolidate programs benefiting households with children and simplify the earned tax credit:
Exemptions, child tax credits, and the earned income tax credit (EITC) all provide relief for households with children but impose conflicting and complicated restrictions on participation, produce varying benefit levels, and require separate forms for tax returns. Consolidating all these benefits into a single credit would demystify tax filing and coordinate the benefit. Doing so might, however, require complex benefit calculations to approximate current benefits. Easing the requirements for EITC filers and equalizing credit criteria for all taxpayers might limit flexibility for some, but would greatly reduce the complexity.
Jeffrey Frank wrote and excellent piece for the New Yorker, “A Four Decade Tax War” which goes a lot deeper on the topic.