Statement of Richard M. Lipton on the Subject of Tax Simplification
April 26, 2001

2.  Individual Tax Provisions

3. Simplify the Earned Income Tax Credit

   The earned income tax rules for low-income taxpayers are among the most complicated rules in the Code. It is ironic indeed that complex rules limit tax relief to individuals who are least able to afford the sophisticated assistance needed to claim the EITC. In effect, Congress has given the poor a tax break with one hand and then taken it away with the other by making it too complex to understand.

   The rules concerning the EITC should be simplified so that they can be understood by the individuals they benefit. This will require a complete revamping of the rules to eliminate many of the limitations and special provisions. Such changes could be expensive, but massive simplification is necessary to make this credit understandable by the individuals it is intended to benefit.

4. Family Status Issues

   The Section strongly urges this Committee to rationalize, harmonize and simplify the definitions and qualification requirements associated with filing status, dependency exemptions, and credits. Complexity in family status issues arise for virtually every taxpayer in one way or another. However, historically (and consistently) most of the problems arise for low and moderate-income taxpayers.

   Family status – such as marital status, whether an individual is a dependent, etc. – affects various tax provisions designed to accomplish different ends. As might be expected, the eligibility requirements are not identical – and the differences cause confusion and result in frequent tax return errors. For example, whether an individual is a dependent for purposes of claiming a personal exemption with respect to that person has little bearing on whether the person is a dependent for purposes of the earned income credit. The provisions and their inconsistent definitions are so complex and varied that we doubt that any amount of taxpayer education could ever eliminate the errors that inevitably occur.

   Family status issues are further complicated by the increasing number of nontraditional families and living arrangements today, a phenomenon that cuts across all income levels but causes particular difficulty for low income taxpayers trying to prepare their returns. Divorced parents are much more common today than they were even 20 years ago. When both divorced parents or multiple generations provide some measure of assistance to the child, there are competing claims for tax benefits relating to that child.

   On top of this, many tax benefits are unavailable to married taxpayers who file separately. This further complicates their tax filing decisions and tax calculations – and increases their combined tax liability over what it would be were they to file jointly.

   Given the differing policy considerations underlying the family status provisions, it may not be possible to develop uniform definitions and achieve optimum simplicity. It is possible, however, to simplify and harmonize the eligibility criteria for many of the provisions and to establish safe harbor tests that provide taxpayers with more certainty and comfort. These provisions should focus on providing certainty to taxpayers (many of whom have difficulty coping with complexity), lessening the intrusiveness of audits on eligible taxpayers, while still targeting cases of fraud or abuse. In addition, the proposals would modify many of the definitions throughout the family status issues to make the consistent where possible. Finally, we recommend extending head of household status to noncustodial parents who can demonstrate their payment of more than nominal child support. This proposal acknowledges that children often have more than one household and that the noncustodial parent who pays child support has a reduced ability to pay tax. The benefit would be targeted primarily to those taxpayers who do not itemize deductions. The proposal would also encourage the payment of child support and remove the incentive for fraud or noncompliance (adjusted for inflation), excluding taxable social security, pensions, and unemployment compensation (items easily taken from the face of the tax return).

   The family status issues we have targeted have been a continuous problem for many years. Their solution would eliminate many sources of controversy from the Code. While we do not know the revenue cost associated with any such fix, instinctively we do not believe it would be high. We urge this Committee to explore and implement these proposals.