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For Immediate Release
Department of the Treasury
Office of Public Affairs
April 15, 2002
Treasury Releases First in Series of Tax Simplification Proposals
First Release Proposes Single Definition of Child
Secretary Paul O'Neill today announced a Treasury proposal for a single definition of child in the tax code, as the first of several proposals to simplify the U.S. income tax code. Secretary O'Neill said, "The tax code is an abomination. It runs unnecessarily to thousands of pages. Many Americans hire tax preparers because they cannot understand the forms and instructions and they are afraid of being punished if they make a mistake. We can take immediate steps to restore some common sense to the tax code and make it simpler and more fair."
The Internal Revenue Code is extraordinarily complex. This complexity imposes a high cost and burden on taxpayers as they try to comply with the myriad tax provisions. Many taxpayers and businesses face significant challenges in understanding the tax laws, keeping required records, and filling out numerous complicated and detailed tax forms which often require working through lengthy, difficult to understand instructions and cumbersome calculations. Our tax code is so complicated, we've made it nearly impossible for even the Internal Revenue Service to understand.
"This burden is too great," O'Neill continued. "Estimates of how much taxpayers spend complying with the tax code range from $70 billion to $125 billion a year, and include literally millions of hours. Consider the example of senior citizens who have some modest retirement savings. Right now, they are prohibited from using the simplest tax forms and are forced instead to use much more complicated forms and wade through much more complicated instructions. They shouldn't have to bear that extra burden at this point in their life. Rather, we should make the process as simple as possible for them.
"This tax code also hurts the economy and strains our society's moral fabric. It imposes costs on taxpayers in terms of time and money spent complying with the code that they could better spend in other ways. Certainly, small business owners would rather invest in their businesses than pay tax preparers, and parents would rather spend a sunny Saturday playing with their children than filling out tax forms.
"One of the unseen consequences of our tax code's complexity is the sense it leaves with taxpayers that the system is unfair and that others pay less tax because of special advantages. When most taxpayers believe that others aren't paying their fair share, compliance with our voluntary tax system begins to fall off - a dangerous proposition for a democracy.
"Simplifying the tax code will reduce taxpayer burden by making it easier for taxpayers to understand and comply with the law, and will increase the sense of fairness -- that everyone is being treated the same."
We support tax simplification proposals that meet these essential principles:
Fairness. Americans want to know that the person down the street or across town is paying his or her fair share. Most agree that the poor shouldn't pay much at all, but those who are able should not get a free ride on the backs of honest taxpayers. Fairness does not mean punishing success, but it does mean that everyone must pay their fair share.
Simplicity. Taxpayers would rather not need tax specialists to prepare their taxes. But today even non-affluent taxpayers need help because the system is so complicated. Many Americans are also concerned they are missing deductions to which they are entitled because the system is so complex.
Clarity. People want to understand their tax obligations and know exactly what they owe. The tax code and the tax burden should be clear to the taxpayer, without the need for extra help.
Ease. The tax code costs too much to comply with and too much to administer. This burden is a drag on the economy and costs jobs. We need a tax code that is simpler, easier to understand, and less costly.
Simplifying the tax code pursues these principles by:
We have before us a monumental task. There are many examples of unnecessary complexity in the tax code. One of the most egregious complexities is that the current Internal Revenue Code provides five major tax benefits relating to children and each has a different definition of a qualifying child. We address this problem with our proposal described below for a uniform definition of a qualifying child.
Inconsistent definitions are just one source of complexity, however. Another is the sheer complexity of some of the calculations taxpayers are required to make. Often taxpayers must refer to secondary schedules that, in turn, refer to various worksheets or publications to perform basic calculations such as to determine whether they qualify for a particular tax benefit or are subject to a phase-out or limitation. Sometimes, taxpayers must choose among a confusing array of options such as when saving for retirement or higher education.
High Costs on Taxpayers
Tax complexity imposes high compliance costs on taxpayers. Some compliance costs arise out of the very nature of an income tax and its need to measure people's income. Other compliance costs are due to the use of the income tax to achieve various social and economic policies. The process of recording and calculating on tax forms is only one dimension of complexity and taxpayer burden. Another is the record-keeping that must occur throughout the year in many cases. Collecting receipts and maintaining files are certainly not beyond the abilities of the vast majority of taxpayers. But the amount of such activity, along with the other dimensions of tax complexity, reach onerous levels few taxpayers find acceptable. Thus, tax complexity may also diminish taxpayer compliance. As National Taxpayer Advocate Nina Olson recently remarked: "We are creating an environment in which even the most compliant taxpayer may wonder: Why bother?"
Who Pays? We do. In both visible and hidden ways
Tax complexity also raises the cost of administering the tax system, and taxpayers pick up the tab. IRS must devote additional resources to provide help for taxpayers, develop regulations, and audit and otherwise correct mistakes in taxpayers' returns. These additional costs are paid for by taxpayers. Many taxpayers must resort to assistance from lawyers, accountants, and other services just to wade through the morass of the tax code. Complexity also erodes the ability of the Internal Revenue Service to enforce the tax laws by focusing on real problem areas, and leaving honest taxpayers alone.
Americans pay in other ways, as well. Every business and employer, large or small, must bear the cost of tax code compliance - the paperwork, the accounting bills, and the lawyer's fees. And the products we all buy might be cheaper, better, or more plentiful if the compliance costs could be reduced.
Drag on the Economy
In addition to the direct costs associated with tax complexity, namely the compliance and administrative costs, tax complexity imposes a substantial drag on the economy in other ways. For example, as tax complexity increases, taxpayers are less likely to predict accurately the tax consequences of their decisions. An inability to predict tax consequences confidently leads to a greater sense of uncertainty about those decisions. This uncertainty can affect important business and family decisions, such as buying a home or car, hiring a new worker, or saving for retirement or for education.
The federal income tax is a machine that generates revenue to pay for the activities of the federal government. Like any machine, the income tax requires regular maintenance, upgrading, and an occasional overhaul. Simplification is part of this ongoing process. The result of tax simplification will be a tax system that is fairer, easier to comply with and administer, easier to understand and predict, and less burdensome on taxpayers, the IRS, and the economy in general.
Starting today, we will begin releasing a series of proposals to simplify the tax code. These proposals will first focus on individuals and subsequent proposals will focus on businesses.
Proposals on the Tax Treatment of Families and Children
The first group of proposals will address the tax treatment of families and children. Topics will include:
Uniform Definition of a Qualifying Child
Today we are releasing the first proposal in this group, concerning a unified definition of a child. This proposal is included as an attachment to this document. There are in the tax code today five major provisions that provide tax relief to families with children, and there are five different definitions of a qualifying child.
The five provisions are:
To see how this can confuse a taxpayer, consider the example of a shared household. Now it is possible for three different family members, who live together for a full year, to claim the same child for at least four different tax benefits:
Yet, none of these women may claim the child and dependent care tax credit, even if they work and pay for the care of the child. To claim that credit, one taxpayer must both support the child and maintain the household in which she and the child reside. Under the proposal, the child's mother (or if the family prefers, the grandmother or aunt) could claim all four tax benefits.
Secretary O'Neill concluded, "The tax code should not scare law-abiding and hard-working citizens when they sign their tax return. Our tax code is still an abomination. It is not worthy of our free society. By beginning to undo unnecessary complexities, we can take the first steps to a better, simpler tax code. We need to start now."