Commentary: A Simple Plan for Simpler Tax Returns
Did you have fun as Apr. 15 drew nigh? Politicians sure did. Republicans spent the day busily decrying the complex Internal Revenue Code even as they trumpeted tax cuts that would make filing more complicated. President Clinton promoted his new USA savings plan, which will create a new tax credit--and add dozens more lines to future returns. The rest of us--or our accountants--were up half the night wrestling with paperwork. The IRS estimates that it took an average 22 hours to prepare a '98 return.
Meanwhile, two little-known House Democrats were doing something to make filing easier. Ways & Means Committee members Richard E. Neal of Massachusetts and William J. Coyne of Pennsylvania have proposals that could cut tax returns by 200 lines. They're on to something.
Neither is pushing grand reform. Nor do they want to raise or lower your taxes. And they are deliberately avoiding such theological debates as whether capital-gains taxes boost investment. Their modest goal: to make life easier in April. "We're simply saying, `let's do the same things in a less complicated way,"' Neal says. "I don't think citizens should dread filling out tax forms."LONG OVERDUE. Sounds good. So how would they do it? First, Coyne and Neal would change the way capital-gains taxes are figured. Neal would also combine eligibility rules for a host of middle-class tax credits and ditch the alternative minimum tax, which can hit taxpayers who have lots of credits and deductions. And he would get rid of the phase-outs for the personal exemption and itemized deductions that plague high-income filers.
There's no question that simplification is long overdue. As many as 20 million taxpayers this year used commercial software to help sort through their tax mess. An additional 60 million gave up and hired someone to do it for them--44% more than in 1980, says the National Taxpayers Union.
Tax complexity costs individuals $67 billion in time, preparation fees, and software, according to Joel B. Slemrod, director of tax-policy research at the University of Michigan. And the price is paid in more than dollars. Says Kevin A. Hassett, a tax economist at the American Enterprise Institute: "As the system gets more crazy and obscure, people have less respect for it and for government."
Capital-gains taxes are typical. Just as many Americans began buying stocks and mutual funds, Congress made it tougher than ever to figure out how much tax to pay on investment earnings.
Before 1986, when mainly rich folks worried about investment profits, the Schedule D cap-gains form was simple. Investors took long-term gains, excluded 60%, and paid ordinary income tax on the rest. Then Congress changed the way gains are figured. Now, there are five rates, depending on the nature of the asset and how much total income the seller has. As a result, a taxpayer who gets mutual-fund gains of a few hundred bucks has to slog through a mind-boggling 54-line form to pay $40 in taxes."EASY." Coyne and Neal would restore the old system. All taxpayers would exclude 38% of gains from income and pay tax at ordinary rates on the rest. It works like this: Say you had $1,000 in profits. You'd subtract $380 and pay tax on the remaining $620 at your regular rate. The result: The 54-line Schedule D would shrink to a manageable 18 lines. "As long as we have a capital-gains tax, we ought to make it as simple and easy as possible to report," Coyne says.
The plan isn't perfect. A 38% exclusion would mean a hefty tax increase for the wealthy and a comparable cut for lower-bracket taxpayers. That's because high-bracket taxpayers now pay a maximum capital-gains rate of 20%. Under the plan, they would be paying a top tax rate of 39.6% on the 62% taxable portion of their gains--or an effective rate of 24%. Ideally, simplification shouldn't get cluttered with efforts to redistribute tax burdens. But the size of the exclusion can always be adjusted. The key is that the shift would dramatically reduce the aggravation factor for everyone.
Neal would also get rid of the alternative minimum tax. Filling out the AMT form was a nightmarish experience for 1 million people this year. And as more families qualify for tax credits for education, child care, and earned income, they will run smack into the AMT. Within a decade, some 8 million taxpayers could get hit. Worse, many won't even know it, so when the IRS catches up with them, they'll get socked with interest and penalties.
For those lower on the food chain, Neal would simplify the rules for all those tax credits. Now, each has its own complicated eligibility requirements. He would have them all begin to phase out at $85,000 for joint returns and $58,000 for single payers.
The well-off get help, too. Today, couples with AGI above $124,000 gradually lose the value of their itemized deductions. And for AGI from $187,000 to $309,000, personal exemptions are phased out. For top-bracket taxpayers, that means a family of four pays nearly 42% instead of 39.6%. Adding insult to injury, the phase-outs require an extra 19 lines of paperwork. Neal would ditch two hidden levies and replace them with a surtax on adjusted gross incomes above $120,000. His plan collects the same amount of tax but makes it easier to figure.
This is one part of the plan that doesn't go far enough. "These [phase-outs] are silly and should be removed," says Brookings Institution economist William G. Gale. "The simplest thing would be to just raise marginal rates."
What about tax reform? It's a laudable goal--for the future. But in the poisonous partisan environment that pervades Capitol Hill today, Congress should focus on clearing away some of the underbrush that entangles so many taxpayers. Simplification, Neal & Coyne-style, would send a powerful signal to fed-up taxpayers. It might even save them money.By Howard Gleckman