Estonia, renowned for having the world's most efficient tax structure, according to the Tax Foundation, has streamlined the process of filing taxes to a mere five-minute task that costs nothing. Their revenue department has ingeniously designed a web-based platform where each citizen possesses a personalized tax account. This account automatically populates tax details such as income, child-related deductions, and tax obligations.
Contrarily, the experience of most Americans during tax season is markedly different. The average US taxpayer devotes approximately 13 hours to preparing their tax returns and spends $240 on tax preparation services. In the previous year, the fortunate 10% of callers who managed to connect with an underfunded and understaffed IRS agent waited for an average of 22 minutes to seek assistance.
In essence, the US tax system has evolved into a convoluted ecosystem that presents challenges of confusion, expense, and time consumption. The underlying question remains: What has led to this intricate tax structure in the United States and the taxing demands placed on both taxpayers and the IRS?
Experts contend that the US tax system seeks to accomplish more than the mere collection of taxes. Congress employs the tax system as a tool to realize economic and social objectives, subsequently placing an overwhelmed IRS in charge of executing these multifaceted plans.
Erin Collins, the National Taxpayer Advocate, explains that Congress, in crafting tax legislation, attempted to incorporate incentives for social benefits. This gave rise to elements like the child tax credit, which, while noble in its intentions, introduced complexity as soon as taxable income started being supplemented.
The American tax code wasn't always this labyrinthine. Rooted in a history that involved resistance against a tea tax and a resounding demand for "no taxation without representation," implementing a federal income tax in the US proved a challenge for years. President Lincoln's introduction of the first federal income tax transpired in 1862, nearly nine decades after the nation's inception. However, this was short-lived, and the tax was revived in 1894, only to be invalidated by the Supreme Court a year later.
It wasn't until the ratification of the 16th Amendment in 1913, as the specter of World War I loomed, that Congress gained the authority to collect income taxes from individuals and corporations. The subsequent evolution of tax filing in the form of the first Form 1040 marked the beginning of the contemporary tax filing process. However, it also signaled the onset of a more complex tax framework.
Over time, administrations oscillated between divergent and occasionally conflicting tax policies. The Economic Recovery Tax Act of 1981 during Ronald Reagan's presidency trimmed individual tax rates, while Bill Clinton later augmented the top tax rate and expanded the earned income tax credit. The Tax Cuts and Jobs Act under Donald Trump subsequently lowered rates and raised the standard deduction. Most recently, the Inflation Reduction Act under Joe Biden introduced clean energy tax incentives.
Daniel Bunn, CEO of the Tax Foundation, observes that this intricate tax landscape mirrors the complicated political landscape. He asserts that while there is consensus about taxing foes and subsidizing allies, the intricate nature of these actions reflects the intricate tax system.
While some states and multistate organizations have taken steps toward implementing incremental reforms, no comprehensive approach has been fully embraced. Individual state actions assist specific businesses in complying with state-specific remote sales tax requirements, but the overall complexity remains unresolved. Moreover, uncertainties persist around the legality of remote sales taxation by states and localities.
Taxes and policy objectives
In the US, policymakers employ the progressive tax system to realize diverse objectives such as promoting retirement savings, providing child care subsidies, and advancing environmental initiatives through an array of deductions and credits. Erin Collins highlights the challenge of balancing multiple goals within the tax code, leading to its complexity.
Simplifying the tax code by removing credits and deductions is far from simple due to the resistance of influential interest groups. For instance, the potent real estate lobby has safeguarded the mortgage interest deduction from elimination for a considerable period of time.
Competing lobbying groups have further complicated the tax code by advocating for numerous separate policies. An example is the corporate tax rate reduction under the Tax Cuts and Jobs Act of 2017, which incentivized different business entities to incorporate in response to the advantageous new tax rate. However, these entities secured special deductions through lobbying efforts.
This intricate tax system has given rise to a thriving industry of tax software companies. Critics allege that these firms lobby to maintain the complexity and cost of tax filing.
Struggle between complexity and resources
Apart from its complexity, the US tax system is managed by an agency ill-equipped to fulfill its myriad responsibilities. Taxpayers often find it frustrating to contact the IRS for assistance. In stark contrast, Estonia's efficient tax service promptly answers calls, reflecting a more service-oriented approach.
However, the IRS is not just a tax revenue collector; it also functions as a provider of social welfare, a distributor of stimulus, and a tax enforcer. The agency faced the arduous task of disbursing stimulus payments while simultaneously handling regular responsibilities. The IRS also had to manage new, temporary tax provisions in the midst of tax-filing season.
The recently enacted Inflation Reduction Act allocates $80 billion in new funding to the IRS, potentially enhancing its service quality. This additional funding aims to improve IRS efficiency and proactive problem resolution, offering relief to taxpayers. Nevertheless, it may not lead to a significant simplification of the US tax code.
In essence, the complexity of the US tax system is deeply intertwined with its multifaceted policy goals, lobbying dynamics, and the IRS's broad responsibilities. While efforts are being made to enhance the IRS's capabilities, achieving true tax code simplification remains a formidable challenge.