Trump's Phony Postcard Tax Return

The tax bill does not deliver the simplification that the president promised.

At a meeting with congressional leaders last month, Donald Trump kissed a postcard-sized tax form, expressing his commitment to simplification of the hideously complex Internal Revenue Code. "Over 90 percent of Americans are going to fill out taxes on that postcard," Treasury Secretary Steve Mnuchin promised on Sunday.

That's not really true, because the bill that emerged from Congress this week does little to simplify the tax code and in some ways makes it even more complicated. The tax return on a postcard, originally a symbol of radical reform, has become a gimmick aimed at distracting the public from a revenue collection system that is just as confusing, frustrating, intrusive, and manipulative as ever.

Hoover Institution economists Robert Hall and Alvin Rabushka promoted the idea of a "postcard tax return" in their 1985 book The Flat Tax, tying it to the elimination of deductions, credits, and every tax bracket but one. Under Hall and Rabushka's plan, everyone would pay a single rate on all forms of income after subtracting a "personal allowance" aimed at maintaining progressivity.

The postcard tax return touted by Trump and Mnuchin, by contrast, is tied to a tax bill that retains seven income brackets (while redefining them and fiddling with the rates) and all the major tax breaks, including the ones for charitable donations, mortgage interest, and state and local taxes. The limits that the bill imposes on the latter two deductions will make tax preparation more rather than less complicated, since filers will have to figure out how much of those expenditures can be subtracted from their taxable income.

The Trump administration's postcard promise is based on a trick that the Tax Policy Center's Roberton Williams highlighted last year: shifting the figuring off the main form. Most of the items on the "Simple, Fair 'Postcard' Tax Filing" that the president kissed, such as "wage and compensation income," "contributions to specified savings plans," "earned income credit," and child credits (doubled under the tax bill but still phased out as income rises), require additional consultation, consideration, and calculation.

The main rationale for the claim that the tax bill simplifies returns is the near-doubling of the standard deduction (which is coupled with the elimination of personal and dependent exemptions). That change is expected to reduce the share of filers who itemize from 30 percent to 6 percent.

The problem is that taxpayers still won't know whether the standard deduction exceeds their potential itemized deductions unless they go to the trouble of documenting the latter throughout the year and running the numbers when they prepare their returns. That work also does not show up on the postcard return.

The tax bill introduces new wrinkles, including a 20-percent deduction for "pass-through" income from businesses such as partnerships and sole proprietorships, which is reported on individual returns. The upshot is that the tax rate for pass-through income will be lower than the individual income rate (but higher than the new, lower corporate rate), inviting new forms of tax gamesmanship.

The last thing our tax system needs is more complexity. According to the Tax Foundation, the Internal Revenue Code, which totals 2.4 million words, is nearly six times as long as it was in 1955 and almost twice as long as it was in 1985. That's not including 7.7 million words of tax regulations or 60,000 pages of relevant case law.

The Tax Foundation says complying with IRS filing requirements consumed nearly 9 billion hours last year, at a cost of more than $400 billion. That's not including billions of dollars in costs resulting from suboptimal economic decisions encouraged by the tax code, or the damage done to principles of fairness when the law is so complicated that the average person cannot reasonably be expected to understand it.

The president said he wanted to "make the tax code simple, fair and easy to understand." It's a worthy aspiration that the tax bill does not come close to fulfilling.

© Copyright 2017 by Creators Syndicate Inc.