The complexity of the U.S. federal income tax system results in significant annual deadweight losses. The opportunity cost of the hours taxpayers spend on record keeping and completing their tax returns amounts to billions of dollars

Question

a. If the tax system was simplified, how would this benefit the economy?
b. Why hasn't the tax system been simplified?

Answer 1

a. Reducing the time and effort now required for record keeping and completing tax returns could be used to produce additional goods and services. Firms and workers who produce these goods and services would receive additional income. Additional benefits would result because people would have less incentive to engage in activities for the purpose of avoiding or reducing their taxes, and more incentive to engage in activities that produce more goods and services.
b. The complexity of the current income tax system is largely the result of the inclusion of provisions that tax people at different rates and allow for income deductions and tax exemptions for specific purposes. For example, homeowners are allowed to deduct from their income real estate taxes and interest paid on their mortgage loans. A simplified tax system that eliminated this and other provisions that reduced the tax liability of various special interest groups would face considerable opposition.