Does the US Tax Code need simplification? Yes! Will it happen? Probably not as long as lobbyists exert so much influence on Capital Hill. The latest attempt is from Senators Wyden and Gregg called the Bipartisan Tax Fairness and Simplification Act of 2010.
The bill hasn't made it to Thomas yet and the text available for download on Sen. Wyden's web site is almost 200 pages so I haven't printed to out yet to read but I have read the "short" form and skimmed the whole bill. And I am under whelmed. I am sure I will have more to say in the future. Right now I want to focus on the sample new 1040 (which can also be downloaded on the Senator's site). On the summary, much is made of the new 1040 which is only one page long. They call it straightforward. I call it a misleading showpiece.
Lets look at income. On the "shorten" form, income is reduced to 2 lines and a total. Capital gains and dividends on one line and everything else on the other. The current 1040 has 21 lines. Now buried deep in the bill may be sections with exclude currently taxable income but a quick skim didn't reveal any. So "simplification" is lumping income. The problem I see in the office is not where to put the income but if they have to report the income. If you are reducing the kinds of income subject to tax, you may be simplifying. Eliminating individual lines that might act as a reminder what needs to be reported is adding to the confusion.
The major source of confusion in our income taxes system comes not from the forms but from the theory. That you can't simplify without hurting some taxpayers. It would be easy to say if you are married - you file jointly or separately. But is that fair to taxpayers who are victims of their circumstances. Under this rule a woman (or man) who has been abandoned by their spouse could never qualify for EIC until they can scape together the money and and meet time requirements to divorce an absentee spouse. You can't get EIC if you file MFS and you've taken away the possibility they could qualify for head of household by "simplifying" the filing status. Dependent qualifications can be the most confusing part of tax preparation and the last time Congress "simplified" them - they made them worse. And don't get me started on the three sets of rules for the First Time Homebuyer's Credit. And even if you do simplify the theory, the confusion remains because the information is still in the taxpayer's brains. I still get asked about "income averaging" even though that hasn't been available since 1987 for anyone but farmers.If you want to simplify the tax code, simplify the confusing theory and not the forms. All you are doing is using smoke and mirrors to cover the increase in confusion you will be causing.