The Republican Tax Plan: Is Simpler Always Fairer?

The Republican tax plan currently under construction in the House and Senate is touted as simpler and fairer.  President Trump often uses those two words, and so do House and Senate leaders. In fact, the website promoting the House version of the plan is fairandsimple.gop. Proponents of tax reform like to brag that their plan will make a tax return fit onto a postcard, the rules will be so simple. And clearly the message is not just “fair and simple.” We are being invited to believe that simplification of the tax code will make it fairer. But is a simpler tax code fairer?  

One way that the House plan simplifies the tax code is by reducing the number of tax rates from seven to four (the Senate Plan keeps seven tax rates).  Under the House plan, a married couple filing jointly would be taxed at a rate of 25 percent if they earned $90,000.  A richer couple, earning $260,000, would be taxed at the same rate.  The current tax code is more complicated, taxing the first couple at a rate of 25 percent and the second at a rate of 33 percent. It’s pretty clear that in this instance, simpler does not mean fairer.  It’s fair to treat like cases alike, and unlike cases differently.  Most of us would see the resources of the two couples as being considerably different. And so a tax code with more rates, which taxes them differently, is fairer, as far as that goes.

We need to look at simplifications on a case-by-case basis, to see if they increase fairness or decrease fairness. Another feature of the House plan (but not the Senate plan) is that it repeals the estate tax after six years, but first increases the amount that’s exempt from taxation from $5.5 million to $11 million. Eliminating a tax is a simplification, but is it fairer to be able to pass on wealth tax-free?  In this case, there’s room for debate.

If Joe earns his income by the sweat of his brow, and Jack earns the same income thanks to his father’s bequest, is there a reason to make Jack pay lower taxes?  When you put it that way, it seems like it would be fairer if he paid the same taxes. In fact, it’s hard to understand why any inherited income should be exempt from taxation.  But there’s a second way to see it.  You could say that our children are part of our extended identity—they are self-like to their parents. So for Jack’s father to transfer wealth to him is a bit like the father, at age 30, giving money to his 31-year-old self—i.e. just keeping it in the bank. If keeping money for your own use next year doesn’t trigger taxation, neither should keeping it in the family.  There are two ways to look at it, but clearly whether an estate tax is fair or not has nothing to do with whether it’s simple or not.

Another simplification proposed in the House plan is the elimination of the deduction for state and local taxes. The New York Times explains: “Under current law, taxpayers can deduct their state and local property taxes, as well as state income taxes or sales tax. The proposed House bill would eliminate the deduction for income and sales taxes, and would cap the deduction for property taxes.” The Senate plan goes even further, getting rid of the deduction for all state and local taxes. These changes would make tax returns come closer to fitting onto a postcard, but would they be fair? They would certainly raise taxes more for people with already high state and local taxes. For example, The New York Times says 46 percent of taxpayers in Maryland took this deduction, which averaged $13,000 in 2015. Only 17 percent of taxpayers in South Dakota took the deduction, which averaged $6,000.

Does that difference in impact make the change unfair? I can see it two ways. You might say that in the current tax system, South Dakota taxpayers are unfairly paying a disproportionate share of federal taxes, and the House bill changes that. On the other hand, you might also say that total tax burdens for citizens in different states shouldn’t be wildly different, and the current system insures that. Whichever argument is better, the crucial question isn’t which approach comes closer to fitting tax returns onto a postcard.

There are vast numbers of changes proposed in these plans, the most significant being a change in the corporate tax rate, but let’s look at one last change to individual taxes. The House plan gets rid of the tax credit for adoption fees (up to $13,570), but the Senate plan restored it after public outcry. Eliminating a deduction increases simplicity more, but which option is fairer?  

You could argue that eliminating the deduction is fairer. Why should someone who wants a child be favored in the tax code over someone who wants a yacht or a grand piano? Not fair!  Maybe not, but this just goes to show that the aims of tax planners go beyond simplicity and fairness.  The tax credit for adoption makes sense to most people because they think it’s important for kids to have adoptive parents, instead of remaining in foster care. The mortgage interest deduction is another one whose rationale has nothing to do with fairness. Neither does the medical expense deduction.  Both of those deductions are retained in both the House and Senate plans, despite increasing neither fairness nor simplicity.

Simplicity is better, other things being equal—why make things harder when they can be easier?  It’s also easier for clever accountants to find loopholes in the tax code, the more complicated it is.   But aside from being preferably simple, a tax code ought to be fair, and should also advance social goals.  It’s not clear that there’s any consistent correlation between the degree of simplicity of a tax plan and either its fairness or its power to advance social goals.