You Can't Do This on a Postcard
Pointing out the lies being told in furtherance of tax “reform” is hardly an original exercise. Borrowing the successful Obamacare repeal playbook, the strategy for passing this monstrosity is to keep the bill secret as long as possible, lie about what the bill will do, and then attack anybody calling out said lies. And the strategy just might cobble together a bare majority to put this thing on Trump’s desk.
There has been much written about how terrible the bill’s overall structure is. There has been much written about its regressive provisions, like ending the estate tax, while raising taxes on the middle. And also about its loopholes, like the lower rate on pass-through entities. Don’t forget the provisions obviously intended to benefit the Trump family directly, like tax breaks for golf course owners. Each of these facts about the bill is expressly disclaimed by its proponents, who say the effect are the opposite of reality. Instead of discussing these lies, I’m going to focus on a smaller lie, but a vile one.
Wouldn’t it be great if you could file taxes on a postcard, yelled the man from Wisconsin. Paul Ryan promised us that “this is within our reach.” This must be true – Paul Ryan, former chairman of the Budget Committee, current Speaker of the House and official Very Serious Person couldn’t be making it up, right? With the proviso that this entire bill could still be replaced with some actual good ideas, it may shock you to know that Ryan is blatantly lying. We can see this by looking at different classes of tax filers, seeing how their process will change with the new legislation.
For people who earn below a certain income threshold (around $10,000) and meet other criteria, you already don’t need to file anything at all with the IRS. It is literally impossible to simplify tax filing for people in this category. Fortunately, it doesn’t appear that anything in the new bill will actively make things worse.
For those above this income threshold, but who have basic tax situations (income less than $100,000 and no dependents, for example) you can use the form 1040EZ. This is a very simple form – it only requires 14 pieces of information. This is precisely the same number of lines as on that famous postcard that Ryan loves to wave in front of the press. The 1040EZ may not be a postcard, but it does have space for some useful information, like the tax filer’s name, address, and social security number. For these filers, nothing in any GOP plan will make taxes easier.
The third group of tax filers are those with returns that can’t fit onto the 1040EZ, but also don’t contain any exotic tax structures. They may have dependents, own a home, receive investment income, or have some other small tax quirks. The main filing challenge for people in this group is that they must decide whether they should itemize their deductions. The way our system works, any filer has the choice between listing their deductions individually on their taxes, or using the standardized, minimum deduction. Because deductions decrease income, and thus taxes, people will choose the maximum of these two methods. Therefore, in order to make this choice, people need to know if their itemized deductions are larger than the standard one. This means that, even for filers who end up using the standard deduction, they must also calculate what the deduction would be if they itemized. Given that there are hundreds of possible deductions, this is admittedly annoying (although it is handled by TurboTax or other tax software).
The Republican plans do nothing to simplify the process for these filers. The standard deduction will apparently be increased, leading to more people using it rather than itemizing. However, this won’t usually eliminate the need for people to calculate their deductions as if itemized. After lobbyists got involved, the end product has nearly as many deductions as before. Therefore, the calculation will be no simpler. Put another way, and addressing Paul Ryan’s claim directly: the “new 1040” will not be any simpler than the current version.
The final group of tax filers are those who have truly complex tax situations. Maybe they have large real estate portfolios or complex business income. Maybe they have weird international exposures, or strange tax-advantaged investments. Their taxes are complex, but, in general, they are quite wealthy.
The thing is, most of the effort that goes into tax compliance for this group isn’t the filing itself, but rather the creation and maintenance of all these aforementioned tax vehicles. There is, so far as I can tell, nothing in any plan that limits tax shelters available to our friendly neighborhood billionaires. In fact, given the glaring loophole created by taxing pass-through income at a lower rate than earned income, we can expect the tax structuring industry to enter a new golden age. New structures will be created, to allow the wealthy among us to pay tax at a rate much lower than you and I pay. Of course, this benefit generally won’t be available to those who work for a living. Those who passively sit on capital will reap the gains of the new complexity.
These four classes broadly cover all individual American taxpayers. As you can see, I have no reason to expect any group’s taxes to be easier to file than they are currently. Those with weird tax situations, and other top earners, will likely see an increase in complexity. But don’t feel too sorry for them – they will reap millions, sticking everybody else with the bill down the road.