A Call for Individual Tax Simplification

By Philip J. Harmelink and William M. VanDenburgh

Tax complexity reached an unprecedented level with the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001. For example, the act contains three-year phase-outs of the personal income and itemized deduction and, incredibly, is completely rescinded on December 31, 2010. A massive congressionally mandated treatise on tax simplification by the Joint Committee of Taxation was released around the same time as the passage of the act.

The present environment urgently calls for practicing tax professionals and tax academics to formulate an aggressive plan of action to address tax complexity. To be effective, this endeavor needs to focus first on individual taxation.

In February 2001, the AICPA, the American Bar Association (ABA), and the Tax Executives Institute (TEI) sent a message to Treasury Secretary Paul H. O’Neill: “The income tax system has now reached a critical juncture. … American taxpayers have lost not only the ability to understand and comply with the law without expending considerable resources, but also respect for a tax system.” Although they articulated a collective willingness to work with the administration, any pretense of a meaningful politically led tax simplification effort was abandoned with the passage of the 2001 Tax Act. As AICPA Tax Executive Committee member Pam Pecarich observed, “[I]f we want compliant taxpayers, we need a system that makes sense and is viewed as reasonable by taxpayers.”

The impossibility of a political solution was confirmed at a December 2001 conference on simplification held by the AICPA, ABA, and TEI in Washington, D.C. At the conference, the House Ways and Means Chair advocated initial repeal of only the corporate alternative minimum tax (AMT) but not the individual AMT, a change that clearly favors special interest groups. In another example, congressmen said that the complex array of IRC provisions dealing with education were too popular to be changed. The AICPA and other groups have made simplification efforts in the past, but on the whole their attempts have been piecemeal and half-hearted.

The authors propose forming a combined committee from the AICPA and the American Accounting Association (AAA) for the express purpose of formulating an individual tax simplification plan. This plan should then be presented directly to Congress and the American taxpayers. This proposed approach is unique in that it—

Our proposed format for simplification would not be limited by political necessities. The JCT simplification study, in contrast, stated: “the Joint Committee staff applied one overriding criterion: the Joint Committee would make a simplification recommendation only if the recommendation did not fundamentally alter the underlying policy articulated by Congress in enacting the provision.” Under our proposal, issues such as depreciation, earned income credit, eliminating all phase-outs, retirement plans, and greater use of default provisions could be fully explored. The JCT, however, made no recommendation on simplifying the overall depreciation system despite recognizing this system to be “a source of significant disputes.”

The accounting profession, with its fiduciary duty to aggressively confront growing tax complexity, should be foremost in representing taxpayers’ interests. While tax simplification can be structured as revenue neutral, many Americans would delay the currently scheduled tax rate decreases if the result would be real tax simplification. Let’s not fail the nation in addressing this deepening quagmire.

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