Majority Leader Kevin McCarthy, in a November 2016 TV appearance, pitched tax reform on a lie. It’s a lie that continues to be repeated as President Trump attempts to advance the Republican tax agenda.
The lie is that reducing the number of individual tax brackets is about simplifying the tax code.
Tax simplification sounds unobjectionable, even desirable, to the average American taxpayer. Each year, Americans spend more than 6 billion hours and $230 billion preparing their tax returns. The average taxpayer spends 13 hours every year on record keeping, teaching themselves how to fill out tax returns, finding tax preparation resources, copying documents, and sending them away to the IRS.
Doing your taxes is not a simple process. Taxpayers fill out their Form 1040 and its 14 attachments to report various types of income, a dozen or so variations of Form 1099 to report income as a contractor, and Form 1098 for their mortgage interest payments. Taxpayers are overwhelmed when they have to calculate their home mortgage deductions, child care deductions, and their student loan payments. Many provisions in the tax code are temporary in nature, and different sources of income are taxed at different rates. And the process is even more strenuous for many small business owners. All of these things are what make the tax code complex for tax filers, and they are what keep tax professionals in business year after year.
Simplification refers to the collapsing of the existing seven tax brackets into three brackets. The problem is that tax brackets have nothing to do with tax complexity.
Reducing tax complexity is a worthy goal as doing so would save Americans time, stress, and money. It would encourage more people to start and grow small businesses. And it would give all tax filers the assurance that they are being taxed fairly and receiving all the tax breaks to which they are entitled.
But this is often not what Trump and congressional Republicans are talking about when they use the word “simplification.” As in McCarthy’s case, simplification refers to the collapsing of the existing seven tax brackets into three brackets. The problem is that tax brackets have nothing to do with tax complexity. Finding one’s tax bracket is as simple as matching income to corresponding rates — a step required whether there are two tax brackets or 20. There is no more complexity than that. Under a code with three tax brackets instead of seven, taxpayers would not be freed from hiring a professional, allowed to spend less time filing a return or be spared any amount of stress and confusion.
In reality, tax brackets have everything to do with ensuring the poor aren’t taxed too much and the rich aren’t taxed too little, or what economists like to call “income tax progressivity.” A graduated income tax system with more income tax brackets ensures that taxpayers are paying the rate most appropriate for their level of income. In almost all incarnations of Republican tax reform plans, including Trump’s, the fewer the tax brackets there are in the code, the more regressive the tax code will be as a matter of design.
Donald Trump’s latest tax plan adopts nearly the same “simplified” tax bracket structure as the House Republican Blueprint with groupings of 12, 25, and 35 percent rates replacing the 10, 15, 25, 28, 33, 35, and 39.6 percent brackets. The result is that more tax relief goes the top 0.1% than goes to the bottom 80% of households combined. This is what helping the very rich over the middle class through tax reform looks like.
In almost all incarnations of Republican tax reform plans — including Trump’s — the fewer the tax brackets there are in the code, the more regressive the tax code will be as a matter of design.
If Donald Trump and congressional Republicans want to make the tax code less progressive then they should come out and make explicit that that is their goal. But if their aim is truly to achieve simplification, they should stop talking about tax brackets and focus on the $1.4 trillion worth of tax expenditures in the tax code that make the code extremely difficult to navigate without a hired professional.
Reducing tax brackets is simply not simplification. The more “simplification” is used to justify making the system more regressive, the more the trust of the taxpaying, voting public is violated. At best, the “collapsing tax brackets = simplification” equation is erroneous and misguided. At worst, it’s deceptive and cynical.
Joon Suh is a policy advisor for the Economic Program at Third Way, a centrist Democratic think tank in Washington, D.C. Joon’s recent work includes a proposal for a regional minimum wage that could work from Oklahoma City to New York City, and an idea brief to create mid-career Prep for Success academies to help adults already in the workforce gain the skills they need to get ahead in the 21st century.
