(The views expressed here are those of the author, the publisher of Income Securities Advisor)

NEW YORK - Once upon a time, the idea of simplifying the federal tax code enjoyed widespread bipartisan political support. Times have changed in this regard, and not for the better. That’s bad news, and not just because of the headaches it causes taxpayers each April.

Conservatives and liberals in the U.S. argue about many aspects of the tax code, but reducing complexity usually is not one of them.

According to the Brookings Institution, “The notion that taxes should be simpler is one of the very few propositions in tax policy that generates universal agreement.” The center-left think tank lists several benefits of simpler taxes, including reducing the expense, time, and mental anguish involved in complying with the U.S. tax system.

To help quantify that, the Tax Foundation estimates that U.S. taxpayers in 2024 will spend more than 7.9 billion hours filing their taxes at an estimated annual cost of $413 billion, based on average hourly compensation, using projections by the Internal Revenue Service and Office of Information and Regulatory Affairs.

For context, total U.S. consumer expenditures on medicine, including prescription drugs, were roughly $450 billion in 2023, according to the National Health Expenditure Accounts of the Centers for Medicare & Medicaid Services. All those hours and dollars represent significant deadweight loss, or reduced economic efficiency resulting from a suboptimal use of resources, a drag on America’s potential growth.

A SIMPLE HISTORY

Former Republican President Ronald Reagan made tax simplification the central focus of his second presidential term’s domestic policy agenda. At the time, discussions of tax reform were influenced by the concept of a flat tax, i.e., a single rate that would replace the existing system involving several income-based brackets.

The legislation that eventually emerged from Reagan’s efforts, the Tax Reform Act of 1986, did not go that far, but it did reduce the number of brackets.

The law, which was passed with the vital support of Democratic Speaker of the House Tip O’Neill, also eliminated several itemized deductions while increasing the standard deduction.

Based on economic theory, this should have reduced deadweight loss, as taxpayers who elect the standard deduction spend much less time filing their returns, or, in the case of those hiring professionals, much less money, compared to those who itemize.

Another positive effect of this tax reform was curtailing the use of abusive tax shelters that steered capital away from its most productive uses within the economy. The law reduced the abusive tax shelters’ appeal by limiting several deductions, credits, and exclusions.

Tax simplification remained part of the political discussion in the following decades. Flat tax proposals were put forth by presidential contenders Jerry Brown, a Democrat, in 1992, and Steve Forbes, a Republican, in 1996.

In fact, simplification was a prominent part of the agenda as recently as 2017, when Congress enacted, and President Donald Trump signed, the Tax Cuts and Jobs Act.

The Tax Foundation reports that this legislation’s near doubling of the standard deduction caused the percentage of tax returns claiming itemized deductions to plummet from 30.6% in 2017 to 11.4% in 2018.

OFF THE AGENDA

This brings us to the recently enacted One Big Beautiful Bill Act. The legislation’s ungainly name should be a signal that it was not designed with simplification in mind.

Consider, for example, the new law’s elimination of tax on tips and overtime. A worker deriving income from either of those sources will now pay less tax than someone earning the equivalent amount solely in the form of salary. In effect, OBBBA has created new tax brackets.

To be fair, OBBBA did further increase the standard deduction. It also made permanent the termination of most miscellaneous itemized deductions and established a new limit on all itemized deductions.

At the same time, however, the legislation created many new wrinkles in the tax code. For instance, it granted one particular exemption to fishers from villages in western Alaska. The act also increased the previous $10,000 deduction for certain Alaskan whaling captains to $50,000.

Those features, likely included in the bill to win the support of Alaska Senator Lisa Murkowski, were by no means OBBBA’s only special-interest provisions.

Farmers, who notoriously enjoy overrepresentation in Congress thanks to the Constitution’s allocation of two senators to both the most populous and least populous states, won the unique right to pay capital gains taxes on the sale of farmland on an installment plan.

That’s not all. Interest on loans secured by agricultural real estate will now be partly excluded from taxation. OBBBA also increased the existing rebate on rum produced in Puerto Rico and the U.S. Virgin Islands.

STREAMLINING

If tax simplification can reduce economic inefficiency and potentially garner bipartisan support, then why is it no longer a prominent objective of tax reform?

This may partly be because certain tax preferences aimed at achieving social objectives – such as those associated with Social Security – enjoy voter support across a broad ideological spectrum.

The rise of economic populism on both sides of the aisle has also likely made anything as extreme as a flat tax a nonstarter.

However, tax complexity could be reduced substantially without something as dramatic as eliminating progressive taxation or doing away with the most popular exemptions.

For starters, this could include consolidating related tax incentives and eliminating sunset provisions, or expiration dates, for some OBBBA innovations.

While we cannot know when or if politicians will resume the fight for tax simplification, what we can assume with some certainty is that groups from all political persuasions will keep pushing for special preferences, making the economy less efficient along the way.

(The views expressed here are those of Marty Fridson, the publisher of Income Securities Advisor. He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and the Budget, The City of New York).

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(Writing by Marty Fridson; Editing by Anna Szymanski and Rod Nickel)