Todd Gee – Sandra Day O’Connor College of Law
Ted Cruz announced his bid for the Presidency by evoking John Lennon’s “Imagine.” Among a list of policy objectives, Cruz asked his would be constituents to imagine “abolishing the IRS.” The sentiment behind this refrain is understandable: Americans do not like to pay taxes. A 2013 survey by the Pew Research Center found that 56% of Americans either hate or dislike paying their taxes, as opposed to 34% who like or love paying taxes. Among the reasons for disliking taxes were that taxes are complicated, inconvenient and involved too much time and paperwork. While Cruz may be an outlier, calls have been made by members of both parties to simplify the tax code. If done properly, amending the tax code could encourage greater social justice by ensuring that credits and deductions are delivered to those taxpayers who need it most.
One reason why the tax code is so complicated is the presence of myriad tax deductions and credits. Tax experts often refer to these deductions and credits as tax expenditures. Congress offers tax credits and deductions as a means to influence taxpayer behavior, or to favor certain industries without giving that aid in the form of an outright subsidy. Spending through the tax code diverts over $1 trillion per year from the Treasury, which is large enough to close the federal deficit in 2014.., In addition to contributing to deficits, spending through the tax code disproportionately favors the rich. Itemized deductions specifically favor the rich because most taxpayers do not itemize their returns. For taxpayers who do itemize, wealthiest Americans benefit more significantly because their tax rates are higher. Put simply, a taxpayer in the 35% tax bracket has more to gain by reducing their income than someone in the 15% tax bracket. While not exclusively the cause of income inequality in the United States, the current construction of the tax code provides a disproportionate benefit to those who need the least help from the government.
However, it is possible to reduce the effect tax deductions have on horizontal and vertical equity by limiting their use. President Obama’s proposed budget for the current fiscal year recommended limiting the value of deductions in proportion to taxable income. The President’s proposal would limit deductions to 2% of income for higher income taxpayers and would accomplish the goals of reducing loss of revenue and encouraging greater progressivity. Other proposals to reduce the negative effects of tax expenditures are raising the floor for itemized deductions, converting deductions to credits, or eliminating itemized deductions altogether. All of these proposals would serve the dual purpose of increasing the government’s tax revenues and encouraging greater vertical and horizontal equity in the tax code. For example, converting deductions to credits will eliminate the disproportionate benefit that deductions give to taxpayers facing higher marginal rates. While these policies would eliminate hidden, structural government spending it is important to recall that elimination of some tax expenditures, such as the deduction for medical expenses, could increase some taxpayers’ liability beyond their ability to pay. Therefore, any proposal to eliminate or limit tax expenditures should ensure that policies that are currently favored, such as alleviating the effect of catastrophic medical expenses, continue to be accounted for.
Proposals like abolishing the IRS are unlikely to be successful and fail to address major shortcomings in the tax system, which contribute to the income inequality problem in the United States. Simplifying the tax code, to eliminate or curtail the use of tax expenditures, is one means that can be employed to ensure that the money spent through tax expenditures is divided more equally among taxpayers.