Politicians on both sides of the partisan divide want to simplify the federal tax code by pruning the thicket of loopholes, exemptions and credits. In fact, President Obama and his presumptive Republican opponent, former Massachusetts Gov. Mitt Romney, have both promised to seek tax simplification if elected in November. A new study by three fiscal policy experts, however, shows that if simplification is coupled with a deep cut in rates, as Romney has proposed, lower- and middle-income Americans would have to pay more in taxes just to keep the same amount of revenue flowing into the Treasury. That's because the necessary reduction in exemptions, deductions and credits would more than offset the savings from the lower rates.
There are compelling reasons to simplify the tax code, such as reducing tax-avoidance trickery and lowering compliance costs. On the other hand, the complexity stems in part from tax breaks that are widely enjoyed, including the deduction for mortgage interest and the exemption for employee health benefits. And despite the broad support for simplification, the parties are sharply split over whether Congress should use the proceeds to reduce the deficit or lower tax rates.
Romney has proposed to reduce rates by 20%, eliminate the alternative minimum tax, end the estate tax and give lower- and middle-income families a larger tax break for investment income. He's also said, however, that his tax plan would not increase the deficit. So to offset the cost of the tax cuts, he has proposed to curtail unspecified tax breaks for individuals.