The complexity of tax systems
Tax systems are complex for several reasons, including multiple objectives like raising
revenue, redistributing income, and influencing behavior 1 . The main features of a good tax
system are equity, certainty, convenience, and efficiency 5 .
There are two types of complexity - fundamental and unnecessary. Fundamental complexity
is inherent in achieving the objectives and features of a tax system. Unnecessary complexity
arises from flawed policy and administration 4 .
Tax complexity can be defined and measured in terms of the costs it imposes on taxpayers to
comply with tax laws and on the government to administer the system 4 . Common measures
include the number of tax provisions, forms, and work hours required for compliance 10 .
Many national tax systems are extremely complex 14 . The U.S. has a multi-tiered income
tax with many brackets, phaseouts, and over 200 deductions and credits 1 . Similarly, India
has a maze of taxes and exemptions at both central and state level 1 . Even average taxpayers
must navigate pages of forms and instructions 2 . And multinational firms employ armies of
lawyers and accountants to minimize taxes across jurisdictions 1 . This complexity imposes
over $400 billion in compliance costs on U.S. taxpayers alone 4 .
To address this, countries are pursuing tax simplification 13 . Measures include reducing tax
brackets and rates, which offers limited simplification 2 . More impactful are eliminating
deductions and credits, though this faces political opposition 2 . Taxing all income at a single
low rate via withholding could dramatically simplify filing 1 . Consolidating the blizzard of
credits and phaseouts also helps 1 . Taxing capital gains as ordinary income in return for
lower rates is another option 1 . Raising standard deductions reduces filing 1 . New
technology can simplify compliance and improve enforcement 1 . Territorial taxes and
broad-based consumption taxes like VAT are simpler than worldwide corporate taxes 5 .
There are compelling reasons to simplify taxes 13 . It eases the burden on citizens, reducing
stress and costs 2 . It cuts administrative overhead for governments 2 . It promotes
transparency and fairness 1 . It makes tax incentives more effective 1 . And it may spur
economic growth by encouraging investment and risk-taking 4 .
Achieving major simplification requires reforming both policy and process 13 . On the policy
side, base broadening, lower rates, and a move to consumption taxes all simplify taxes 2 .
Consolidating provisions helps 1 . Transparency about distributional impacts enables scrutiny
of tax breaks 1 . Process reforms like multi-year budgets, expert commissions, and oversight
requirements improve incentives 1 . With balanced reforms, countries can achieve simpler,
fairer taxes.
The Importance of Simplifying a Country's Tax System
There are compelling reasons why countries should aim to simplify their tax codes and
systems. Complex tax regimes impose high costs and inefficiencies that hinder economic
performance. For example, in the United States, the estimated compliance costs of the income
tax alone were over $200 billion in 2016 - more than 1% of GDP. This represents time and
money that could be better spent on more productive economic activities 1 .
Complexity also undermines tax compliance and enforcement. For instance, Italy loses over
€90 billion annually to tax evasion, with complexity being a major factor 2 . Simpler tax
systems like Estonia's make compliance easier and improve collections 3 . Estonia's
electronic filing takes just 3 minutes for most taxpayers 4 . Italy, in contrast, has turned to tax
amnesties to improve compliance, forgiving interest and penalties for those who pay overdue
taxes 5 .
Additionally, complex regimes cause more taxpayer errors and disputes with tax authorities.
In Germany, a top desire is simplification to increase predictability 6 . France has also seen
disputes rise with frequent tax law changes 7 . Predictability and stability are key for
taxpayer confidence and planning.
Overall, simplification can reduce compliance costs, improve enforcement, and provide
greater certainty for taxpayers. The many steps taken by countries as outlined previously,
demonstrate a widespread recognition that the consequences of complexity warrant reform
efforts. With simpler taxes, countries can free up resources for more productive uses in their
economies.