As the April 18 deadline for filing income tax rapidly approaches, many people will complain about how complicated the whole process is. But there is a flip side: income tax filing provides “one stop” shopping that enables taxpayers to receive, in one fell swoop, the benefits of numerous social policies and economic incentives. The provision of these programs in the tax code complicates filing returns but simplifies people’s interactions with government.
Consider a similar example: In the old days, people shopped at the butcher, the baker, the pharmacist, the florist, and so on. Now, supermarkets and superstores have all those options available in one place. This makes shopping easier and requires less time. People may bemoan the loss of mom-and-pop operations, but no one complains that the change has made shopping more complicated.
Similar ideas apply to taxes. Just as stores have provided increased convenience by carrying a wider variety of products, legislators have chosen to run many social programs and economic incentives through the tax code rather than as separate spending programs. Special tax provisions–in the form of exemptions, exclusions, preferential rates, deferral rules, deductions, and credits–support everything from childcare to retirement saving, from healthcare to energy efficiency.
The provision of these programs in the tax code complicates filing returns but simplifies people’s interactions with government.
This arrangement avoids the logistical nightmare that would occur if people had to sign up separately for each federal tax subsidy. Imagine applying directly to the Department of Housing and Urban Development for a mortgage interest deduction, the Department of Treasury for a capital gains subsidy, and the Department of Health and Human Services for a child credit. Each department would likely have its own application and its own requirements for documentation, creating a tangled web of bureaucratic forms.
Making the 1040 the application form for all these programs complicates the act of tax filing but also simplifies the overall time burden placed on taxpayers trying to receive their due government benefits or incentives. In a similar vein, shopping at a superstore for a variety of goods may require more time at the store than it would take to do each individual errand, but it would still take less time shopping on an overall basis.
The Free Application for Federal Student Aid (FAFSA) provides an example of the benefits of consolidation. The program used to require students to collect their family’s tax records and manually enter the data into a separate form. It was so complicated that many eligible students, especially those from low-income families, failed to complete the paperwork to receive financial aid. In 2009, however, Congress and the Department of Education simplified the application by automatically transferring the required tax information from Treasury’s database onto the FAFSA. This saved families time, reduced data-entry mistakes, and made the program more efficient and effective.
One may not like the existence of various subsidies in the first place, but that is a different issue. Sometimes people throw up their hands in despair and argue for a vastly simplified system that taxes income at a flat rate and has no deductions. What is usually left unsaid in those proposals is that this either means moving all the social programs and economic incentives to the spending side of the budget and to numerous federal and state agencies to administer–which would obliterate any net simplification benefit–or it means eliminating vast swaths of social and economic policy–which should be examined through a lens broader than tax simplification.
Besides the provision of social and economic policy, there are, of course, many other reasons–some good and some bad–why taxes are complicated. But recognizing the subtle benefits as well as the obvious costs of complicated taxes may help people understand that in many ways the current system is actually simpler than any plausible alternative way to deliver the same benefits. In taxes, as in life and in running errands, the key question is often “compared to what?”
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