"We All Want Simpler Taxes. Here’s Why That’s So Complicated" - Laura Sanders

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In this article, Laura Sanders explains that while a less complex tax system is wanted by many Americans, there are significant obstacles and hurdles which impede this simplification. Sanders describes how taxpayers are seeking to blow up the current tax system and establish a flat tax as a solution to the tax code’s confusing complications. In a flat tax system, the same type of tax is applied to all income levels with no deductions or exemptions allowed. Proponents of this type of system believe that it encourages taxpayers to earn more because they will not be penalized by higher rates and tax brackets. However, critics argue that this system is unfair to low-wage earners who will receive the same amount of tax compared to the wealthy. 

Throughout the article, Sanders emphasizes how the U.S. income tax system is extremely complicated with no perfect solution available to simplify it. One reason behind this is how the current tax code reflects the intricate financial and social life in America, where clashing views often intersect and restrict any progress with simplifying the tax system. Sanders mentions how while one industry may view a tax incentive as advancing the public good, such as a mortgage-interest deduction or a retirement account, others may view it as an unnecessary and wasteful policy. With the upcoming expiration of the 2017 Tax Cuts and Jobs Act which lowered the corporate tax rate from 35% to 21%, some in Washington are preparing for a radical income-tax simplification. When the reforms expire in 2025, several income-tax provisions will end regarding current rates and brackets, which taxpayers seeking simplicity see as the perfect opportunity for a change in the tax system. In fact, Sanders cites two Washington policy groups who propose eliminating itemized deductions, meaning they would also be getting rid of tax credits for college education and electric vehicles and tax breaks for mortgage interest, medical expenses, state and local taxes, charitable donations, and gambling losses. 

Ultimately, many of the breaks used by millions of taxpayers would cease to exist. Sanders warns taxpayers to carefully consider the consequences of simplifying the taxing system, explaining how there would be unwelcomed trade-offs such as the high price of simplification. In addition, she explains how a flat tax would only address part of the problem while failing to properly define income and tax definitions. These definitions are typically long and complex because they need to precisely describe human and economic activities and avoid loopholes which could be exploited, such as with dependents. 

Another point Sanders raises is how individual income tax makes up a large portion of federal revenues, providing over half in 2022. Moreover, about 80% of individual income taxes were paid by around 10% of taxpayers with incomes of $200,000 and above, meaning the wealthier play an even more significant role in funding the federal revenues. By switching to a flat tax system, Sanders points out how these groups with higher incomes would benefit by paying significantly less in taxes and thus hindering the federal revenue as well. Ultimately, simplification of the tax system needs to incorporate changes to capital-gains preferences or else the wealthy could benefit immensely. In 2023, for instance, taxpayers with $1 million or more of income reported 72% of total long-term gains while those with income between $200,000 and $500,000 reported only 12%. 

Reading this article served as a reminder of the complexity of the tax system and of the different aspects we are learning in class. I remember learning about the different types of taxes including income tax, corporate tax, sales tax, etc, and the difference between tax credit and deductions. However, I had never stopped to consider the true complexity of the current U.S. tax system and the other side of the coin, which would be a flat tax. Sanders managed to give a brief explanation of what this other side would entail and what the negative consequences and trade-offs could be,  although I believe she might not be recognizing how a flat tax is not the only alternative or solution for taxpayers who seek to simplify the taxing system. From my perspective, there are other possibilities and small changes that could help organize the current system where many Americans feel the need to hire assistants to organize their taxes. One way could even be a focus on improving financial literacy in the specific area of taxes, which means that although there is no actual change to the taxing system, it still feels simplified to those who gain a better understanding about the system and how it functions. Another possibility could be modifying the numerous tax credits and deductions and joining them into a single, standardized deduction available to all taxpayers. Overall, this article gave me a broader view of how intricate the taxing system currently is in the U.S. and possible arguments and counter-arguments to the other possibilities of simplifying the tax system and making adjustments for the future.

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Sources

Saunders, Laura. “We All Want Simpler Taxes. Here’s Why That’s So

Complicated.” The Wall Street Journal, 15 Mar. 2024, www.wsj.com/personal-finance/taxes/flat-tax-pros-and-cons-c06cc31e. Accessed 27 June 2024.