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Be Careful Where You Trim—Viewpoints | EPI

Opinion pieces and speeches by EPI staff and associates.


Be Careful Where You Trim

by Max Sawicky

On its face, tax simplification is unassailable, like Mom and apple pie. But sometimes you have to watch out for Mom. Just ask Tony Soprano. The Internal Revenue Service does not have a warm and fuzzy public image, but the agency’s national taxpayer advocate is doing a valuable public service. Lest we forget, the source of tax complexity is Congress.

One of the advocate’s most important ideas is to adopt a simpler, consistent definition of “qualifying child” for taxpayers who use dependent exemptions, the Child Tax Credit, the Additional Child Credit or the Earned Income Tax Credit.
This would be a good step forward, providing, as the saying goes, we “leave no child behind.”

But the advocate’s non-partisan posture prevents the advocate from taking the next logical step. Instead of keeping multiple different benefits for families with children, why not unify them into a single tax credit? Among other virtues, such a move could provide tax relief to the millions of working families who were excluded from last year’s tax cut.

Along with the good tax simplification, there is the bad and the ugly. For example, the so-called “flat tax” would enable an individual with a zillion dollars of interest, dividends and capital gains to pay exactly zero tax. Proposals to abolish the alternative minimum tax on corporations would relieve some of our largest, most profitable corporations from any tax liability. President Bush’s Treasury secretary advocates the abolition of the entire corporate income tax.

Who wouldn’t like their own taxes “simplified” like this? The inescapable reality is that many people and business firms have very complicated finances. To cope, tax law must have complicated rules.

The foundational principle of our system is taxing according to the ability to pay, and income is how we gauge that ability. Defining income for tax purposes can be tricky, so we are beset with simplification proposals that solve this problem by allowing income to escape tax altogether. This is like reducing the crime rate by legalizing bank robbery.

The moral of the story: Beware simplistic proposals for tax simplification.

Max Sawicky is an economist at the Economic Policy Institute.


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