Wednesday, April 14, 2010

An April 15th Perspective

Casey Mulligan has a great piece on the downside to simplifying our tax code. Here are a couple of excerpts:
But it’s easy to overlook an important side-effect of tax complexity burdens — and the taxpayer anger created by them. Such aggravation helps sustain the sizable and energetic group of Americans who want their government to get by with less.

As President Obama’s head of the National Economic Council, Lawrence Summers, once wrote, “A better tax system may lead to more wasteful spending.” Even Professors Robert E. Hall and Alvin Rabushka, longtime advocates of simpler tax code, concede that a simpler tax makes it much easier for advocates of larger government spending programs to be successful. (See p. 48 of their book.)
Here's how he concludes:
So we could eliminate some of your perennial mid-April frustration by replacing the income tax with a simpler and more efficient tax code, but in that case be prepared to send a greater fraction of your income to the United States Treasury.
Most people would like a simpler tax code (who loves figuring out how much they paid?), and I don't know many people who like the idea of paying taxes. Mulligan points out that there is a tradeoff between the two. It's true that people might be willing to pay more for a simpler tax code. How much more they would willingly pay is an empirical question.

Given this tradeoff, what is the optimal tax code complexity? How much higher would taxes be if we had a simpler tax code? Would it be worth it?

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