GOP Bills Remove Some of the Tax Code's Complexities

By Richard Rubin Features Dow Jones Newswires

Republicans promise to create a tax system so simple that 9 of 10 Americans could file returns the size of postcards. The plans moving through Congress don't make tax filing quite that easy, but they do mark a step toward a simpler system.

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They would repeal the alternative minimum tax, a parallel tax system affecting more than four million households. The House bill would consolidate a tangle of tax breaks for higher education. Both plans would remove -- temporarily -- thorny depreciation rules. Narrow deductions for tax-preparation fees, teachers' out-of-pocket expenses and moving costs would vanish under the House plan, removing lines from tax forms and pages from Internal Revenue Service publications.

The full House and a Senate committee are each expected to vote this week on the competing plans, as Republicans push to have a tax bill signed into law by year-end. Simplification is part of the GOP's pitch to voters, but for many filers, a simpler tax code without the breaks they use the most could leave them paying more.

Still, "on simplification, it's actually pretty good," said Lawrence Zelenak, a Duke University law professor. "It gets rid of several things which add a lot of complexity for a lot of ordinary taxpayers."

The National Taxpayer Advocate, an internal IRS watchdog, estimates tax-filing costs about $195 billion a year and six billion hours in annual compliance costs.

The plans' biggest simplification affects itemized deductions. Republicans want to repeal the personal exemption, which would let taxpayers in 2018 subtract $4,150 from taxable income for themselves, their spouses and each of their dependents.

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They would replace it with a nearly doubled standard deduction of at least $24,000 while limiting or repealing deductions. The House and Senate would repeal the deduction for state and local income and sales taxes; the House would retain a partial property-tax deduction.

Despite the larger standard deduction, the repeal of the personal exemptions means the amount of income that is tax free wouldn't be close to doubled. Instead, fewer people would itemize deductions because fewer would exceed the standard deduction.

That is a backdoor way of limiting tax breaks for mortgage interest and charitable contributions, and it's why many home builders, real-estate agents and charities oppose the GOP plans.

"The guy who's getting a salary and a W-2, his life's going to be a whole lot easier when he goes to fill out his tax return," said Rep. Tom Rice (R., S.C.), a tax lawyer and member of the House Ways and Means Committee, which approved the bill last week.

The House's combination of policies means 6% of households would itemize deductions, down from about 30%. That means less time tracking charitable contributions and other expenses and it's what's behind the postcard vow.

"Ninety four percent of the people would not itemize based on this new tax bill, and that is so simple," said Rep. Jim Renacci (R., Ohio), an accountant and committee member.

Still, the promise of postcard-style filings was never wholly realistic, because even behind postcard-sized filings are calculations, work sheets and definitions that add complexity, time and work to many returns.

For many households, simpler isn't necessarily better.

A married couple with $30,000 in deductible medical expenses for nursing home care generally fares worse under the House bill than today. The House plan would repeal the medical expense deduction, pushing that family to the $24,400 standard deduction and taxing more of their income.

The same is true for households taking the student loan interest deduction, now available to households that use the standard deduction; it would disappear in the House plan.

"Many of the people that I represent would rather have their loan interest deduction, if they have substantial student debt, than being able to file on a postcard," said Rep. Lloyd Doggett (D., Texas).

The tax code is complicated in part because the U.S. delivers social and economic policy through taxes, under the logic that a "tax break" is easier to sell politically than an equivalent spending program. Some complexity is designed to stop businesses and high-income households from cheating. And the U.S. tax system is complicated because interest groups -- from colleges to financial-services firms -- get lawmakers to insert and protect their favorite breaks.

"Until our society gets more simplified, you're not really going to have a way you mail in a 10-line tax return," said Mark Steber, chief tax officer at Jackson Hewitt Tax Service Inc.

For some people, the status quo is preferable, even within a $1.5 trillion tax cut over a decade. About 8% of households would pay higher taxes in 2019 under the House plan than under current law, according to the Joint Committee on Taxation. By 2027, that rises to nearly 20%.

The Senate plan retains the medical-expense and student-loan interest deductions. Comparable analyses of that proposal aren't available yet.

Some of the House bill's touted simplifications don't add up to much.

Republicans talk about consolidating seven individual tax brackets into four, but that does little to reduce complexity. The difficulty is in definitions and record-keeping, not computations handled by tax software or 30 seconds with a calculator.

The Senate plan, set for a committee vote this week, retains a seven-bracket structure.

In other cases, Republican plans add new complexity. They retain today's tax brackets for capital gains and dividends while changing ordinary income brackets, so anyone with investment income has two different rate structures. They would add new rules for pass-through businesses such as partnerships and S corporations. For top-bracket households, the House creates a "bubble rate" that claws back the benefits of the bottom bracket.

"They're not going to solve complexity overnight," said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation. "It's not perfect, but we're definitely moving in the right direction."

Write to Richard Rubin at richard.rubin@wsj.com

WASHINGTON -- As Republicans move forward on their tax bills this week, part of their pitch is that 9 in 10 Americans would ultimately be able to file returns the size of postcards. While the plans don't make tax filing quite that easy, they do mark a step toward a simpler system.

The GOP plans would repeal the alternative minimum tax, a parallel tax system affecting more than four million households. The House bill would consolidate a tangle of tax breaks for higher education. Both plans would remove -- temporarily -- thorny depreciation rules. Narrow deductions for tax-preparation fees, teachers' out-of-pocket expenses and moving costs would vanish under the House plan, removing lines from tax forms and pages from Internal Revenue Service publications.

The full House and a Senate committee are each expected to vote this week on the competing plans, as Republicans push to have a tax bill signed into law by year-end. Simplification is part of the GOP's promise to voters, but for many filers, a simpler tax code without the breaks they use the most could leave them paying more.

Still, "on simplification, it's actually pretty good," said Lawrence Zelenak, a Duke University law professor. "It gets rid of several things which add a lot of complexity for a lot of ordinary taxpayers."

The National Taxpayer Advocate, an internal IRS watchdog, estimates tax filing costs about $195 billion a year and six billion hours in annual compliance costs.

The plans' biggest simplification affects itemized deductions. Republicans want to repeal the personal exemption, which would let taxpayers in 2018 subtract $4,150 from taxable income for themselves, their spouses and each of their dependents.

They would replace it with a nearly doubled standard deduction of at least $24,000 while limiting or repealing deductions. The House and Senate would repeal the deduction for state and local income and sales taxes; the House would retain a partial property-tax deduction.

Despite the larger standard deduction, the repeal of the personal exemptions means the amount of income that is tax free wouldn't be close to doubled. Instead, fewer people would itemize deductions because fewer would exceed the standard deduction.

That is a backdoor way of limiting tax breaks for mortgage interest and charitable contributions, and it's why many home builders, real-estate agents and charities oppose the GOP plans.

"The guy who's getting a salary and a W-2, his life's going to be a whole lot easier when he goes to fill out his tax return," said Rep. Tom Rice (R., S.C.), a tax lawyer and member of the House Ways and Means Committee, which approved the bill last week.

The House's combination of policies means 6% of households would itemize deductions, down from about 30%. That means less time tracking charitable contributions and other expenses and is what's behind the postcard vow.

"Ninety four percent of the people would not itemize based on this new tax bill, and that is so simple," said Rep. Jim Renacci (R., Ohio), an accountant and committee member.

Still, the promise of postcard-style filings was never wholly realistic, because even behind simple filings are calculations, work sheets and definitions that add complexity, time and work to many returns.

For many households, simpler isn't necessarily better.

A married couple with $30,000 in deductible medical expenses for nursing-home care generally fares worse under the House bill than today. The House plan would repeal the medical expense deduction, pushing that family to the $24,400 standard deduction and taxing more of their income.

The same is true for households taking the student loan interest deduction, now available to households that use the standard deduction; it would disappear in the House plan.

"Many of the people that I represent would rather have their loan interest deduction, if they have substantial student debt, than being able to file on a postcard," said Rep. Lloyd Doggett (D., Texas).

The tax code is complicated in part because the U.S. delivers social and economic policy through taxes, under the logic that a "tax break" is easier to sell politically than an equivalent spending program. Some complexity is designed to stop businesses and high-income households from cheating. And the U.S. tax system is complicated because interest groups -- from colleges to financial-services firms -- get lawmakers to insert and protect their favorite breaks.

"Until our society gets more simplified, you're not really going to have a way you mail in a 10-line tax return," said Mark Steber, chief tax officer at Jackson Hewitt Tax Service Inc.

For some people, the status quo is preferable, even within a $1.5 trillion tax cut over a decade. About 8% of households would pay higher taxes in 2019 under the House plan than under current law, according to the Joint Committee on Taxation. By 2027, that rises to nearly 20%.

The Senate plan retains the medical-expense and student-loan interest deductions. Comparable analyses of that proposal aren't available yet.

Some of the House bill's promised simplifications don't add up to much.

Republicans talk about consolidating seven individual tax brackets into four, but that does little to reduce complexity. The difficulty is in definitions and record-keeping, not computations handled by tax software or 30 seconds with a calculator.The Senate plan, set for a committee vote this week, retains a seven-bracket structure.

In other cases, Republican plans add new complexity. They retain today's tax brackets for capital gains and dividends while changing ordinary income brackets, so anyone with investment income has two different rate structures. They would add new rules for pass-through businesses such as partnerships and S corporations. For top-bracket households, the House creates a "bubble rate" that claws back the benefits of the bottom bracket.

"They're not going to solve complexity overnight," said Andrew Moylan, executive vice president of the right-leaning National Taxpayers Union Foundation. "It's not perfect, but we're definitely moving in the right direction."

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

November 12, 2017 19:46 ET (00:46 GMT)