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

2.  Individual Tax Provisions

5. Extenders

   Uncertainty in the tax law breeds complexity. The constant need to extend certain Code provisions (such as AMT relief for individuals, the research and experimentation tax credit, and the work opportunity tax credit) adds confusion to the law. In many cases, temporary extension undermine the policy reasons for enacting the incentives in the first place because the provisions are intended to encourage particular activities but uncertainty surrounding whether the provisions will be extended leaves taxpayers unable to plan for those activities. The on-again, off-again nature of these provisions, coupled in some cases with retroactive enactment (which often necessitates the filing of an amended return), contributes mightily to the complexity of the law. These provisions should be enacted on a permanent basis.

6. Rationalize Estimated Tax Safe Harbors

   Section 6654 imposes an interest charge on underpayments by individuals of estimated income taxes, which generally are paid by self-employed individuals. This interest charge generally does not apply if the individual made estimated tax payments equal to the lesser of (i) ninety percent of the tax actually due for the year or (ii) one hundred percent of the tax due for the immediately prior year. The criteria for the prior year safe harbor have been adjusted regularly by the Congress during the past decade. Between 1998 and 2002, for individuals with adjusted gross income exceeding $150,000, the prior year safe harbor percentage increases and decreases from year to year over a range from 105 to 112 percent. The purpose of these increases and decreases is to shift revenues from year to year within the five and ten year budget windows used for estimating the revenue effects of tax legislation. Congress should determine an appropriate safe harbor percentage (perhaps 100%) and apply that amount for all years. Consideration should also be given to simplifying estimated taxes (for example, by the enactment of a meaningful safe harbor) for all corporations.

7. Eliminate Elections

   Many provisions allow taxpayers to elect special treatment. While some elections are necessary and appropriate (e.g., election to be treated as an S corporation), elections and safe harbors, even those enacted in the name of simplification, often increase complexity. The availability of an election frequently requires taxpayers to make multiple computations to determine the best approach, thereby adding significant complexity. For example, the various elections available under recently enacted section 6015 with respect to innocent spouse relief increase planning and procedural complexity significantly. Likewise, some recent proposals for eliminating or reducing the so-called marriage penalty would effectively require married couples to compute their income twice to determine which approach yields a lower tax payment. In lieu of providing multiple approaches to the same goal, Congress should develop a single legislative solution to address a specific problem, and should make such a solution as simple and fair as possible.