Paul Ryan's Unicorn Tax Postcard
Paul Ryan is back on the teevee talking about tax reform. As always, a major goal is to simplify individual income tax filings. And this is a worthy goal, no doubt. “Imagine filing your taxes on a form the size of a postcard,” he says. “Wouldn’t that be something?” It would be something, and he even helpfully shows you the postcard. Unfortunately for the postcard-printing business, Ryan’s favorite tax-form prop would not allow you to file your taxes on its own.
It looks attractive, fourteen “simple” questions, addition, subtraction and you are done. But if you have ever looked at a IRS Form 1040, then you are well aware that it is not the “front page” that complexifies tax filing. Let’s drill down on Mr. Ryan’s postcard.
Wage and compensation income seems pretty simple. However, but there are many other types of income that are subject to taxation, such as IRA distributions, alimony and social security. Potentially, he means “total income,” but another form is going to be required to total up all of these sources. What about sole proprietorships that are ignored for tax purposes (like LobbySeven)? A Schedule C will be needed to handle that. We are one line in and already the postcard doesn’t work. Line 2 is even worse; “investment income” means a lot of different things and is taxed in a lot of different ways. For famously large tax returns, most of the paper comes from having to include the form for each of these investments: a 1099, K-1, or various others. As we saw on the Rachel Maddow Show, Donald Trump’s 1040 isn’t much more complex than yours or mine. The great stack of paper is just because he has a piece of many entities, each of which needs its own form. Now, if preferential rates on Capital Gains went away, there would be less need for all these entities and their forms. But I don’t think this is what Mr. Ryan has in mind.
Line 3 is simple enough, but Lines 4 through 6 are a real problem. All taxpayers need to decide if they should itemize their deductions instead of using the standard ($12,600 for married persons filing jointly). To figure this out, another form will be required. Totaling up your taxable income seems easy – but Ryan leaves out the Alternative Minimum Tax, which is actually pretty annoying to figure out (and to pay). Presumably, Ryan is saying that the AMT goes away in his plan. Which is fine, as the AMT is not a great policy – but then how does he ensure that the wealthy people with structured income pay any tax? Or, if they no longer do, how does Ryan make up the lost revenue?
Lines 9 through 11 go through the various credits. Again, presumably Ryan is eliminating other credits, such as for foreign taxes paid? This might be a problem - Americans living abroad could end up paying over 100% of their income in taxes. The Earned Income Tax Credit is one of the few portions of the tax code that is popular among Democrats, Republicans and economists. This is because it helps the lower-to-middle-income workers without dis-incentivizing said work. But in order to do so, there is some math involved; that’s not going fit on the postcard either. I could quibble with Line 13 also because it doesn’t include estimated tax payments, but I think you get the point.
Like his attempts at fiscal discipline, Paul Ryan’s taxes on a post-card plan is made of mystery meat. The reason why most people can’t file taxes on a postcard is because they have multiple sources of income that are treated differently. If, after all the evidence, you still think Ryan is a policy wonk, a big thinker with bold plans – maybe you aren’t aware that the already existing IRS form 1040EZ also has exactly 14 lines to fill out! It can be used by Now, it can’t fit on a postcard – but it also includes some useful information like the taxpayer’s name and Social Security Number. The 1040EZ is limited to only those with simple returns, but the 1040A is only a bit more complex. Almost half of taxpayers use one of these simplified forms; more likely would if they knew they were eligible.
Again, none of this is to say we shouldn’t simplify our tax code. But length of tax returns is just not a very good metric. Eliminating the benefits of structuring income is the real way to lower the cost of tax compliance. This is true no matter how long the eventual IRS forms would be. But most of these this structuring is highly beneficial to Ryan’s base and I don’t think he is proposing to eliminate them. Like all of Paul Ryan’s “big proposals,” his taxes on a postcard doesn’t stand up to the slightest scrutiny.