Why Tax Brackets Aren't the Key to Simplifying the Tax Code

The devil is in the details.

Photographer: Daniel Acker/Bloomberg

In the TurboTax era, simplifying the tax code has almost nothing to do with the number of tax brackets.

You wouldn't know that from listening to Republican presidential hopefuls, who are touting their plans based in part on how aggressively they tear up today's seven-bracket income tax structure for individuals.

Chris Christie said Tuesday that he wants three brackets. Marco Rubio says two. Ben Carson is going for the one-bracket flat tax. And Mike Huckabee, a longtime backer of a national retail sales tax, wants no income tax brackets at all.

Here's the reality: Computers do most of the work now, so whether there is one bracket or seven makes virtually no difference to the average taxpayer. No one has to do painful algebra or squint at tables full of numbers.

"The rate is a little bitty piece there," said Roberton Williams, a fellow at the Tax Policy Center in Washington. "All the complexity is everywhere else."

What matters more about tax brackets is the spacing between them–which is occasionally absurd.

For example, the 35 percent tax bracket for single tax filers applies to income between $411,501 and $413,200 this year, squeezing into the tiny space between the 33 percent and 39.6 percent brackets.

If your income is in that range, and you're trying to figure out whether your $10,000 charitable donation will get you $3,960, $3,500 or $3,300 back from the IRS, you can't.

But that's a problem that doesn't require fewer brackets, just more rational ones.

Beyond the brackets, the tax code is complicated because the world is complicated, and because we use the tax code to do so much more than raise revenue. It delivers everything from benefits for kids to subsidies for teachers who buy classroom supplies with their own money.

The real complexity in the tax code is embedded in the phase-ins and phase-outs of tax incentives, the alternative minimum tax, the tangle of overlapping breaks for education and energy and the pages and pages of rules designed to make sure people can't magically transform wages into low-taxed capital gains.

To their credit, some of the Republican plans attack those problems too.

What would real simplification look like?

Treat all income the same, including capital gains, says Williams. Then eliminate as many deductions and credits as possible.

"But that's getting rid of a lot of stuff that people like," he said. "Good luck with that."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE