It's no surprise to anyone that the current U.S. tax system is complicated. Last year, Americans spent over $220 billion and 6 billion hours complying with federal tax laws, and the current Code is over 3.9 million words long. It's increasingly likely that individuals will resort to paid preparation software and services to file their taxes, and even then there are no guarantees that it will be done correctly: the Government Accountability Office found in a recent study that only 2 of 19 randomly selected professionals were able to accurately calculate the filer's appropriate refund amount.
However, there is an additional cost associated with these complexities that can't be measured in time or dollars. There were at least 642,000 instances of tax-related identity theft reported by the Internal Revenue Service (IRS) in 2012, and the political targeting scandal that's been playing out in the news over the past year resembles allegations of IRS abuse and mismanagement that goes back as far as the days of the Kennedy Administration.
National Taxpayers Union Foundation just released a new policy paper, The Need for Tax Reform: Simplicity, Savings, and Security, to further analyze these risks, but also to highlight some of the options for reform that lawmakers and administrators might consider going forward. Among those alternatives are Congressman David Camp's Tax Reform Act of 2014, a comprehensive overhaul of the current system; the flat tax; and the FairTax, which would replace the system entirely. All of these proposals have different implications for cost, complexity, and security issues that taxpayers ought to be aware of.
The Camp proposal, for instance, could increase revenue and broaden the tax base by simplifying the system, eliminating deductions, and adjusting tax credits. However, it would leave most of the existing system's infrastructure and administration, including the IRS, untouched. On the other hand, the FairTax would eliminate the IRS and completely do away with the individual and corporate income taxes, instituting a consumption-based tax instead. While that may mitigate some of the security and complexity concerns facing the current system, there are costs upfront that would have to be addressed.
The current tax Code is certainly in need of reform. Our newest paper is meant to explore some of the economic, administrative, and security-related tradeoffs inherent in the proposals facing lawmakers right now.