Beyond raising revenue, the federal tax system has profound effects on economic performance, business decisions, and individual taxpayers.
The Tax Cuts and Jobs Act of 2017 (TCJA) changed significant features of the nation’s individual, business, and international tax system. Concerns about the federal tax system's economic inefficiency, unfairness, and complexity drove some of these changes (including the elimination of personal exemptions in favor of a larger standard deduction).
However, the tax system remains complex, which limits the ability of taxpayers to understand and comply with tax laws. Furthermore, the TCJA made significant changes that reduce tax revenues—which is likely to contribute to the nation’s growing imbalance between revenue and spending. The nation’s response to the COVID-19 (coronavirus) pandemic has heightened this imbalance.
The criteria typically used to evaluate tax policy provisions and compare tax reform proposals—such as fairness, efficiency, simplicity, transparency, and administrability—often conflict with each other, requiring trade-offs. Some questions for policymakers to consider as they assess potential future tax reform include:
- Fundamentally changing the tax base—e.g., switching from an income tax to a national consumption tax. One type of consumption tax is a value-added tax, which is widely used around the world. (The TCJA did not make fundamental changes to the tax base.)
- Broadening the tax base—i.e., increasing the income subject to taxes while lowering tax rates. This could benefit the economy by minimizing tax preferences for specific types of investments and activities. (The TCJA lowered rates for both individuals and businesses but it did not introduce comprehensive base broadening.)
- Reassessing tax expenditures—e.g., credits, deductions, exemptions, and preferential tax rates. Tax expenditures have various economic and social policy purposes but they also decrease tax revenue. And their success in achieving their intended goals is often not assessed.
Tax Cuts and Jobs Act: Considerable Progress Made Implementing Business Provisions, but IRS Faces Administrative and Compliance Challenges
Virtual Currencies: Additional Information Reporting and Clarified Guidance Could Improve Tax Compliance
Tax-Law Enforcement: IRS Could Better Leverage Existing Data to Identify Abusive Schemes Involving Tax-Exempt Entities
Tax Administration: Opportunities Exist to Improve IRS's Management of International Tax Dispute Resolution
Low-Income Housing Tax Credit: Actions Needed to Strengthen Oversight and Accountability
Tax Policy: Differences in Definitions and Rules in the Tax Code
Tax Expenditures: Background and Evaluation Criteria and Questions
Tax Policy: Factors for Evaluating Expiring Tax Provisions
Tax Policy: The Research Tax Credit's Design and Administration Can Be Improved
Value-Added Taxes: Lessons Learned from Other Countries on Compliance Risks, Administrative Costs, Compliance Burden, and Transition