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The Republican Tax Bill Doesn’t Actually Simplify The Tax Code

H&R Block’s shareholders endured a rough patch in early November, and the initial draft of the GOP’s tax overhaul appears to be at least partly to blame.

On Nov. 2, Rep. Kevin Brady, the chairman of the House Ways and Means Committee, and Speaker Paul Ryan unveiled the original version of the House bill, kicking off nearly two months of frenzied congressional dealmaking that resulted in a measure making its way to President Trump’s desk. Their initial pitch included a promise that 9 in 10 Americans would be able to file their taxes on a postcard, in part because a higher standard deduction would offset the incentive to maximize the tax code’s myriad benefits and loopholes. To emphasize the point, the pair brought a prop to their announcement that read, “Simple, Fair ‘Postcard’ Tax Filing.”

On the surface, that looked bad for H&R Block. The company, which processed 19.7 million American tax returns in 2016, exists because so many Americans would rather pay someone to do their taxes than perform all those calculations themselves. If filing were to become as easy as writing a postcard, then H&R Block stood to lose business. As Trump said when he met with Brady and Ryan: “The only people that aren’t going to like this is H&R Block. They’re not going to be very happy. That’s probably one of the only companies in the country that’s not going to be thrilled.” The firm’s stock price dropped 2.6 percent that day to $23.86, the lowest since April 24.

Shareholders shouldn’t have panicked. H&R Block’s stock price has gained 14 percent since Nov. 2, as it became clear that postcard filing was more gimmick than revolution. The vast majority of American families already take the standard deduction, and many of those that do still feel they need help with their taxes. So the ability to file “on a single, little, beautiful sheet of paper,” as President Trump put it in a televised address on Dec. 13, never was going to dramatically change the lives of American taxpayers on its own. That would have required pairing a simple filing system with fewer credits, deductions and gimmicks. Instead of using a rare political opportunity to reform the tax code, Republicans chose to slash the corporate tax rate. Most of the loopholes remain in place.

It’s hard to argue against the idea of a simpler tax code. Americans spend about 6 billion hours a year on their taxes, equivalent to the workload of some of the country’s largest industries, according to the Taxpayer Advocate Service (TAS), a branch of the Internal Revenue Service. The TAS estimated a compliance cost of $195 billion in 2015, or 10 percent of tax receipts.

All those hours spent on our taxes have value, even if some of them would have been used to relax.1 But Americans also surely would use some of that time to shop or maybe work some overtime — both of which would contribute to economic growth.

Republicans leaned on Americans’ general frustration with the tax code as they attempted to build support for their proposals and promised to make life easier at filing time. “[M]illions of families will be able to keep more money by simply claiming the new standard deduction,” Bill Flores, a Republican congressman representing Waco, wrote on a Texas news site on Nov. 24. “No longer will most American families have to keep boxes of receipts or try to keep up with changes to the existing complex code to see which purchases and expenses they can use to lower their taxes.”

Flores was playing a rhetorical trick there. Most American families already forgo cataloging their receipts and opt for the easiest path possible. H&R Block chief executive Jeff Jones said on a conference call with Wall Street analysts on Dec. 6 that about 70 percent of all taxpayers already choose the standard deduction, saving themselves the bother of filling out an itemized tax return. That number will climb, according to the bill’s advocates; the percentage of filers who choose to itemize their returns could fall to 6 percent, The New York Times reported on Dec. 16. The Times also cited a background analysis that said “this reduction in complexity and record keeping also may result in a decline in the number of individuals using a tax preparation service, or tax preparation software, or a decline in the cost of such service or software.”

H&R Block doesn’t see it that way. Among the firm’s clients, Jones said the percentage who opt for the standard deduction is about 80 percent, higher than the national average. “While much attention has been given to the increase in the standard deduction, many taxpayers will still be required to file multiple forms and worksheets for various sources of income and credits that aren’t going away,” Jones said on the conference call. “For example, the proposed 14-line postcard tax return included refundable credits, something we know taxpayers want help with to ensure they are getting all the credits to which they are entitled.”

If Trump really wanted to disappoint tax preparers, he would have insisted on getting rid of more deductions — it’s difficult to have a simple filing process without a simple tax code. That also would have put less strain on the budget deficit. The surest way to maintain revenue while reducing income-tax rates is to get rid of benefits designed for specific groups. Economists call this “broadening the base.” By cutting down on the opportunities to wiggle out of paying an annual contribution to the Treasury, governments can reduce the burden of most taxpayers while making the system more fair.

The government refers to these benefits as “tax expenditures.” The Treasury’s latest annual roundup lists hundreds of them. According to the TAS, forgone revenue from expenditures ($1.4 trillion) was greater than what Congress budgeted for discretionary spending ($1.2 trillion) in the 2016 fiscal year. But while the Republicans talked about broadening the base and getting rid of many of these expenditures, they never got serious about it. The original Senate bill would have eliminated only one of the 10 most expensive expenditures: the state-and-local-tax deduction. Then Republicans lost their nerve when politicians and supporters from states such as New York, New Jersey and California complained about losing the benefit. The deduction made it into the final bill, although with a cap of $10,000 on the amount of such taxes that can be deducted.

There were other nips and tucks of that sort; for example, the mortgage-interest deduction will be limited to loans of no more than $750,000, down from $1 million currently. But when it came to actually eliminating benefits, the GOP largely chickened out. The only benefit to get the ax? Americans no longer will be able to deduct alimony payments, a provision that would affect fewer than 800,000 taxpayers, if the number of divorced persons is a guide.

Perhaps the biggest thing working against a truly simple tax code in the U.S. is that the United States conducts much of its social policy through tax provisions. An awesome number of tax breaks have been put in place over decades of political tinkering to achieve ends that other countries seek through program spending, such as the child tax credit, a stipend the federal government pays to all but the richest families to help with the cost of raising children. The credit was actually expanded under the new plan, to $2,000 from $1,000, to win Florida Senator Marco Rubio’s vote.

So despite all the hype, Congress appears to have missed its once-in-a-generation chance to prune the tax code. In “A Fine Mess,” journalist T.R. Reid observes that Congress manages to enact significant tax changes every 32 years: 1922, 1954 and 1986. By that historical coincidence, Reid reckoned 2018 would be a good time for a tax overhaul. He was close — which suggests the next time won’t come along for decades.

All of this has left H&R Block’s management unfazed by the Republicans’ talk of a creating a tax system so simple that scores of accountants would be put out of business. On the conference call, Jones told the analysts, “We’re excited by the upcoming tax season.”

Footnotes

  1. Stress costs the economy tens of billions of dollars per year in lost work days.

Kevin Carmichael is a journalist and senior fellow at the Centre for International Governance Innovation. He has written about economics and politics for two decades from Ottawa, Washington and Mumbai.

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