Tax Analysts Blog

Trump Wants a Simple Tax System. History Says He Won't Get It.

Posted on Sep 10, 2017

President Trump wants to make the income tax simple again. Unfortunately, it’s never been simple – not in the last year, the last decade, or even the last century. And it’s probably going to stay that way.

In remarks last week, Trump put his finger on the problem. “We must make the tax code as simple as possible,” he declared. “It's extremely complex, it's not fair, and it's extremely hard to understand.”

Trump has been known to pine for a simpler time with simpler taxes. “In 1935, the basic 1040 form that most people filed had two simple pages of instructions,” he recalled last month. “Today, that basic form has 100 pages of instructions, and it's pretty complex stuff.”

Trump is right: Tax forms and their instructions used to be shorter. But that doesn’t mean they were simpler. In fact, taxpayers have been complaining about complicated forms, instructions, and everything else for more than  100 years.

The griping actually started before the income tax was even on the books. Congress enacted it in late 1913, but even as they were drafting the legislation, critics were piling on. "Some of the efforts of the lawmakers at Washington to express in intelligible and legally binding English their ideas of what they want to enact are nothing short of pathetic," complained The Wall Street Journal.

In fact, the Journal was using the prospect of a new tax to drum up sales for its explanatory series on the legislation. "Do you understand the income tax bill?" the paper asked in promotional material. "If you do not, this will tell you how you may learn all about its many intricacies, the infinite confusion it will cause, its possible unconstitutionality, and its injustice."

Things didn’t get any better once the tax was on the books. In its early years of operation, the income tax drew ample scorn. “Why can't we have a simpler method?" asked The New York Times in 1920. "What are the excuses given by members of Congress for the complications? Will they try to simplify the procedure?"

In fact, members of Congress were themselves confused by the law. “I guess you will have to go to jail," wrote Sen. Elihu Root to a worried correspondent in 1913. "If that is the result of not understanding the Income Tax law I shall meet you there. We will have a merry, merry time, for all our friends will be there.”

Root understood a hard truth about the income tax: It’s complicated and likely to stay that way. Even the biggest fans of taxing income have acknowledged that it is inherently complex.

Rep. Cordell Hull – sometimes called “the father of the income tax” in recognition of his pivotal role in drafting the 1913 law – put the matter simply: "It should be remembered that an income tax is in its character a complex and intricate matter,” he said, “because it deals with business which grows more and more complex."

Over the last 100 years, Americans learned to live with that sad reality – but they’re still not happy about it. Indeed, when Trump calls for simplification, he’s speaking for many of his constituents. In a recent poll by the Pew Center, 43 percent of Americans said they were bothered by “the complexity of the tax system.”

But here’s the problem:  Many people want a simpler tax system, but they want other things even more. Specifically, they want the tax system to be fair.

In that same Pew Center poll, complexity was actually third on the list of tax complaints. The first two (polling 62 percent and 60 percent, respectively) were “some corporations don’t pay their fair share” and “some wealthy people don’t pay their fair share.”

And that’s the heart of the problem—making sure that companies and individuals pay “their fair share” usually involves some measure of necessary complexity.

Which is not to say that tax reform can’t make a bad situation better. The income tax could certainly be made less complicated than it is today. But it’s unlikely to ever be truly simple. Even the famous tax reform of 1986 – the aspirational model for today’s reformers – didn’t really make the tax system much simpler.

For what it’s worth, fans of taxing income have generally been OK with complexity. Cordell Hull, for instance, agreed that baby steps toward simplification were a good idea. But ultimately, he believed taxpayers needed to just suck it up. "If each one reads the instructions first, carefully, there would not be much difficulty now," he sniffed in 1920.

Politicians used to be more candid with their constituents.

For more on the history of tax complexity, visit the Tax History Project at Tax Analysts.



Read Comments (5)

Mike55Sep 12, 2017

Great article, which effectively defeats one of my tax policy "pet peeves." As you explain, an income tax system can never be simple. However, I'd even take it a step further: simplicity is not a rational objective for a tax system in the first place.

I think cars serve as a helpful analogy here: much like the U.S. tax code, cars have grown far more complex over the years and have now reached the point where the average driver has no clue how their vehicle works. Yet no one complains about the complexity of modern cars. We're instead pleased by the safety, comfort, performance, reliability, etc. all that technological sophistication has afforded us.

The reason is that while cars have grown mind-numbingly complex, the process of driving has if anything become simpler. And that's what actually matters... a system can be quite complicated, so long as the user experience of those interacting with the system is not negatively effected. In fact, it often turns out that making a system easier to use requires added complex (e.g., anti-lock brakes, automated transmissions, power steering, etc. in cars, rev. procs. and safe harbors in tax codes).

So I vote yes for things like pre-populated returns, adequately staffed IRS hotlines, safe harbors, etc. that make it easier for people to satisfy/understand their tax filing obligations. These are good things we should all want. But understand that none of it has anything to do with making the tax code itself simpler... in fact the opposite would likely be true.

Travis RechSep 13, 2017

Very much agree with your analogy re: cars.

The complexity complaint does have SOME merit to it in a handful of cases, which deserve to be at least considered. Rationally, complexity usually scales with income. A man who makes $19,000 annually of w2 income ought to have a simpler return compared to the man who makes $1,900,000 annually with a dozen different income streams. The man with the higher income is more likely to be able to afford the imposition of complex accounting and preparation as befits his situation. Higher income, after all, is a nice problem to have.

The breakdown of the fairness of the complexity curve breaks down in two keys areas to my mind:

1. Earned income tax credit. The average taxpayer who qualifies for the EITC generally speaking relies on professional preparers to complete what would otherwise be very simple 1040 EZ returns. I love the EITC and what it represents, but the implementation is as your driving example shows, not a very good experience. Not only from complexity, but also the fact that it pushes a large number of less sophisticated taxpayers into the arms of predatory preparer/lenders. This is one area that is in huge need of simplification.

2. The lack of ready return. I know many in the tax prep industry fear the ready return as a loss of business but we really need to embrace ready returns for simple w-2 filers. In your automobile analogy this would be the self-driving car. Sure, for many of us and our clients they wouldn't qualify, but we very much do need those "drivers" who do qualify for ready return to be "off the road." David Cay Johnston on this very website wrote a very cogent explanation of this issue.

I feel like solving just these two issues would close most of the "complexity complaints" experienced by the majority of American taxpayers. The last would be the unsophisticated small business owner filing out a schedule C on his or her own, but I feel that may be too big a challenge to reform satisfactorily.

Edmund DantesSep 14, 2017

perceptive comments to an excellent article. i agree with all of it.

for me, the complexity issue has been resolved by the PC tax preparation programs. i think it is scandalous that the tax rules are so complicated that a personal computer is essential for tax calculations, but since I have a computer i can stop thinking about it.

still, because I know about the complexity, I can't escape the feeling that someone who is more adept at dealing with complexity can pay less tax than I have to. complexity enters the tax code in the pursuit of fairness, but its presence undermines the perception of fairness.

Bracket CreepSep 19, 2017

Good discussion - and just like auto mechanics, tax professionals address most of the problems associated with complexity. And the costs of that complexity (higher priced cars) is numbed by auto loans with longer repayment terms and low interest rates (much like how withholding numbs the pain of paying taxes).

But the analogy has some holes. The act of driving remains the same despite added complexity – drivers still control the wheel the same as they did 30 years ago and there are no additional record keeping requirements, insurance hasn’t changed, inspections are the same, etc. However, filing taxes has changed. Taxpayers (and third parties) now need additional documentation for things like health care and education credits, so taxpayers have to interact with additional parties outside the system. Drivers on the other hand, still only interact with mainly an auto shop, the RMV, and their insurance company.

I also don't think people complain about the complexity of the cars because it benefits them directly - it makes them safer. Applying the car analogy to the tax system, I don't see how most taxpayers benefit from an overly complex system. Perhaps the point is that some degree of complexity is needed to deliver tax credits? However, some degree of complexity is then also needed to deter ineligible taxpayers from claiming credits.

In my opinion, you have to view simplicity from the pre-filing stage. Most people need a predictable outcome (in this case, what the taxes would be) to engage in a transaction. Also, complexity is the reason the IRS has to spend 20-25% of its budget on taxpayer services, most of which is for low-income taxpayers. In the car analogy, these taxpayers probably don’t own cars and instead use public transportation. So why don’t we give them a cheaper, alternative product in the tax system? In my experience, the answer might be a consumption tax for any taxpayer that makes less than $50k a year (income taxes would remain for those above the threshold). It would free up some of the $2.5 billion spent on taxpayer services and outreach and most importantly, eliminate tax-related identity theft to claim fraudulent refunds.

Mike55Sep 25, 2017

Lots of good thoughts here, thanks. One thing though... I'm not sure if the things you note are really "complexity" as opposed to just "annoying."

For example: it's not especially complicated to satisfy the new healthcare requirements: all you need to know is your insurer's name, your policy number, and how long you were covered. Yes your insurer needs to send you a form, but in reality most folks already know this stuff and the form is duplicative. Entering the data is not always a fun process if your have multiple family members (why on earth do those policy numbers need to be so many digits!), but that doesn't make it "complex." I think our elected officials have created this game where everything we don't like about the tax code gets blamed on "complexity," whereas in reality we might just dislike the simple thing being required of us.

Maybe a better way for me to make my point is by specific comparison: consider that Section 482 consists of two straightforward sentences, while Sections 162 & 274 are a lengthy rats nest of vague language and cross references. Yet it's generally easy to figure out what you can/cannot deduct, but virtually impossible to set an accurate transfer price. In this case, the simpler law ends up creating more complexity.

There are of course examples that go in the other direction as well (i.e., a simpler code section actually drives a simpler result). The point is just that there's not such an obvious correlation between tax code complexity and outcome, so making "complexity" the villain might not be such a great approach to tax reform.

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