Freakonomist Steven Levitt is excited about a plan by Austan Goolsbee to eliminate tax returns for people with relatively simple tax situations (eg receiving income from only one employer). A massive amount of paperwork would be eliminated, saving real costs of $44 billion.What caught my eye in Levitt's piece was this:
I’m a little surprised the US is so slow catching on to this idea. This system has been employed in New Zealand for several years and it seems to work pretty well.
By Goolsbee’s estimates, as many as 40 percent of all Americans could be covered by the Simple Return. He reckons this could save 225 million hours of tax preparation time per year and $2 billion in spending on tax preparers.Economists spend a lot of time discussing the deadweight loss from high marginal taxes - Greg Mankiw has a terrific piece on the issue here. But I wonder if we're barking up the wrong tree. The deadweight loss from compliance and enforcement costs of a complicated tax code are massive as well, but this topic is largely only discussed by economists working for think-tanks. I suspect we would be better served in working on making the tax code far less complicated rather than simply lower.
Obviously some groups would lose a great deal of their cherished deductions were taken away. However, Canada's Andrew Coyne believes overall a revenue-neutral tax simplification plan - where deductions and complications were eliminated, but marginal rates lowered, would be a political winner:
At some point in the not too distant future, one or another of this country's party leaders is going to campaign for office waving . . . a postcard. "This," he or she will proclaim, "is what your tax return will look like under my tax plan. As you can see, it's only got 10 lines on it. You can fill it out in about five minutes. No receipts to keep, no complicated forms to fill out, no need to hire an accountant. And the rate? Just 15 per cent."I'm not sure if I agree with Andrew - because deductions, some of which are only used by a select few, are being removed, the people who gain from such a change have relatively modest gains relative to the people who lose. Recall what the Logic of Collective Action has to say about those situations.
That candidate, I predict, will be swept to power. It won't even be close. Tax reform bores like me tend to drone on about incentives and revenue neutrality and marginal rates of snzzzzz. But what will light a fire under the average taxpayer, even more than the promise of lower rates, is that postcard.