Building a user-friendly income tax is no easy task. The U.S. tax system does much more than raise revenue; it redistributes income and rewards certain choices, like having children, going to college, and saving for retirement. And even the simplest taxes need detailed rules and collection mechanisms.
Urban Institute researchers can provide facts and nonpartisan perspectives for columns and articles on tax code complexity. Read more in the reports linked below and listen to Senior Research Associate Roberton Williams in the podcast at right.
KEY FACTS
- Tax provisions that many Americans support also create the dreaded complexity in the code. Credits, deductions, and exclusions for home ownership, college education, and retirement savings, for example, appeal to taxpayers but make it harder to complete each year’s tax forms.
- To balance tax breaks with revenue needs, Congress has designed provisions to apply only to taxpayers in particular income groups. This helps lawmakers meet budget goals—and deliver benefits to targeted groups—but complicates the tax code.
- In 2000, taxpayers spent an average of 26 hours and $149 preparing tax forms. Some taxpayers had it easier; filers using the 1040EZ, a simplified form, spent an average of 8 hours and $17 per return. High-income and self-employed taxpayers spent the most time and money preparing their taxes. More than half of all tax filers use paid preparers and many people who do their own taxes rely on computer software to guide them through the complex morass.
- One possible fix is to streamline similar tax benefits. Numerous provisions—each with slightly different rules—apply to the same general activity, such as raising children, saving for retirement, or going to college. For example, students must decipher the Hope and Lifetime Learning credits and the deduction for tuition and fees. Consolidating these provisions would simplify taxes, possibly with little or no forgone revenue.
- Another option is standardizing the income levels at which different tax benefits apply. A number of tax credits phase out at different income points, so claiming each credit requires a separate worksheet and tax calculation for each taxpayer.
Additional analysis is available in UI reports:
Listen to Roberton Williams describe the politics and policies behind the complicated federal tax code.
