Could Income Taxes Become Easier to Understand?
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What is the main topic discussed in this episode?
Here's your Money Briefing for Wednesday, March 20th. I'm J.R. Whalen for The Wall Street Journal.
And if we had more simplification, we'd have less complexity and less money to pay tax professionals to help us. And we wouldn't have to spend time complying with the law. We would just obey it.
We'll talk to Wall Street Journal tax reporter Laura Saunders after the break.
Simplifying federal income taxes in the U.S. could make it a lot easier to understand and potentially avoid paying more than you owe. Wall Street Journal tax reporter Laura Saunders joins me.
Why are tax-simplification talks resurfacing now that 2017 changes expire?
Laura, calls for simplifying the tax code seem like they're as old as time. Why is this chatter happening now?
Well, it's happening now because at the end of 2025, many of the tax features of the 2017 tax overhaul evaporate. They expire. They go away. The ones that affect individuals, the tax rates we have now, the brackets we have now, the standard deduction that was nearly doubled, and many other things, the Section 199 business deduction, they all expire. And so Congress has to do something. And so everybody's getting their act together to suggest simplifications or reforms or things like that.
How could simplification make things easier for them?
Well, it could be a whole lot better.
How could IRS automatic filing and simplification reduce taxpayer burdens?
The IRS has a program right now that allows people to have automatic filing of tax returns through the IRS. And if we had more simplification, we'd have less complexity and less money to pay tax professionals to help us. And we wouldn't have to spend time complying with the law. We would just obey it.
Maybe less of a need, it seems, for a math degree to get through all this?
Yes. Yes, exactly.
There's been no shortage of ideas for simplifying taxes, but are there serious proposals on the table now?
There are lots of serious proposals. Two particularly are in the limelight right now. One is from the right-leaning tax foundation, and it would drastically overhaul everything. And the other one is from the liberal-leaning tax policy center.
And there's some common ground here that they would affect the Schedule A tax.
These two proposals have a lot in common. They would get rid of all of your Schedule A deductions if you're itemizing home mortgage interest, medical, state taxes, all those kinds of things. Now, not that many people itemize anymore, about 10%. But still, those are pretty important deductions.
Are the proposals that would affect Schedule A and the itemized deductions, is that being taken seriously?
One of them is going to be out this week and the other one is already out. And we'll see what kind of reception there is.
Which serious reform proposals are currently being debated in Congress?
This is all going to be talked about over the next couple of years.
We often hear about a flat tax where there would be one tax rate for everyone. Why hasn't that been pushed through as a way to simplify things?
There are a couple of reasons. One is that a lot of people think it's unfair. Just think about it. A flat tax would be great for Bill Gates. It would be less good for you, and it would be really not good for somebody who's very poor because you all pay the same price for a loaf of bread.
Full disclosure, I make a lot less money than Bill Gates. True.
How would eliminating Schedule A itemized deductions change taxpayers' returns?
Don't we all?
And so there's a kind of a fairness issue there. The other thing is that people don't realize is that the complexity of taxes is not in the rates. It's in the definitions. It takes six pages of questions to find out whether somebody you support is your dependent. So the issue is really tax definitions. What if we had a flat tax? You would still have to define income. And everybody would want to have it defined so that their income wasn't taxable and your income is.
We've seen moments of compromise with sweeping changes made to tax rules, 2017, 1986.
What are the pros and cons of adopting a flat tax to simplify filing?
Why don't these moments of compromise and changes, why don't they always stick?
Often they don't stick because somebody doesn't want them to stick. And I'll give you an example. If we have major reform, one of the big issues will always be lower rates for capital gains. We have those right now. Capital gains are taxes on investment earnings.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:03–1:11
2
Why are tax-simplification talks resurfacing now that 2017 changes expire?
1:11–1:56
3
How could IRS automatic filing and simplification reduce taxpayer burdens?
1:56–3:16
4
Which serious reform proposals are currently being debated in Congress?
3:16–3:47
5
How would eliminating Schedule A itemized deductions change taxpayers' returns?
3:47–4:23
6
What are the pros and cons of adopting a flat tax to simplify filing?
4:23–5:01
7
Why do major tax overhauls like capital-gains rules struggle to remain permanent?
5:01–5:39
8
How likely is Congress to pass simplification before the 2017 provisions expire?
5:39–6:08
Speakers
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