September 26, 2017

Bigger Standard Deduction Makes Taxes Lower and Fairer


  • The individual tax code is a complicated mess – Americans spend 6 billion hours and $263 billion annually trying to comply with it.
  • An increase of the standard deduction can help people keep more of their hard-earned money, make taxes more fair, and simplify the filing process for millions of taxpayers.
  • The standard deduction was created in 1944 to achieve these very purposes.

It’s possible the best example of dysfunction in Washington is America’s complex and confusing tax code. It leaves most people practically guessing each year about how much they owe in taxes. To illustrate the point, the IRS instruction book for last year’s two-page 1040 form ran 106 pages long. Even that wasn’t enough – the instructions directed taxpayers to numerous “tax topics” for more information and included 15 worksheets. This has led some advocates for equity and simplicity in the tax code to propose expanding the standard deduction.

The TAx Code Wastes A Lot of Time and Money

The complexity of the tax code rewards taxpayers who can afford to hire expensive lawyers and accountants to help them take full advantage of the breaks in the code. It penalizes working Americans who can’t afford this high-priced help. Families and businesses together spend 6 billion hours every year complying with the tax code, at a cost of $263 billion. By making the tax code simpler, making it fairer, and lowering rates, we can ease the burden it imposes on all Americans.

Taxpayers Taking the Standard Deduction in 2014

Standard Deduction_Paper

a higher Standard Deduction Promotes Fairness

Even with all the time and money wasted by our complicated tax code, it could be even worse if it were not for the standard deduction. The standard deduction allows taxpayers to choose between taking a single big deduction or itemizing each deduction they qualify for separately – but not both. Taxpayers who choose the standard deduction can reduce their adjusted gross income without having to save their receipts or fill out many pages of paperwork.

The standard deduction was created in 1944 because the federal income tax had moved from a tax on wealthy Americans to a more broad-based tax on the middle class. Expecting all working families to deal with the complexities of itemizing deductions was too much. Approximately two-thirds of taxpayers take the standard deduction when filling out their taxes. In the 2016 filing season, the standard deduction was $12,600 for joint filers and $6,300 for single filers. Many of them understand that if they itemized deductions they would actually pay more in tax, so they opt for the standard deduction instead.

“With a significantly expanded standard deduction, the tax code would immediately become much simpler for the vast majority of middle class taxpayers” Senator Orrin Hatch, 9-14-2017

The House’s “Better Way” tax reform blueprint and the Trump administration’s tax plan both propose expanding the standard deduction. Senator Ron Wyden, the top Democrat on the Finance Committee, has also proposed increasing the standard deduction.

If the standard deduction were increased, fewer people would use the itemized tax breaks that still remain after tax reform. For this reason, groups such as Realtors and home builders oppose raising the standard deduction. Realtors say that increasing the standard deduction will lower home values. Just as some today raise concerns over increasing the standard deduction, the 1944 creation of the standard deduction drew similar objections. Some groups, including charities and churches, argued that allowing taxpayers to use the new standard deduction would reduce contributions.

Since the standard deduction already makes taxes simpler for many low- and middle-income taxpayers, raising it should help simplify taxes for many more Americans. It would remove many taxpayers from the income tax rolls altogether.

The Tax Code Should Treat Taxpayers Equally

An increase in the standard deduction would bring fairness for taxpayers by allowing them to use whatever option would give them a lower tax bill. It would also help get the tax code closer to what economists call “horizontal equity” – the concept that taxpayers with equal incomes should pay equal tax.

The U.S. tax code will never be perfectly fair as long as there are policies the government wants to promote with a tax break. Tax incentives for so many things mean that Washington treats taxpayers differently. For example, imagine two families that are identical in every way except that one family rents its home and the other family owns its home. If the homeowner family takes the mortgage interest deduction, these two families will pay different tax bills.

Tax incentives – while often meant to encourage worthy behavior or reward sympathetic groups – can increase public perception that the tax system is unfair and increase frustration with Washington. An increase of the standard deduction can help make the system fairer by treating more taxpayers equally.

Issue Tag: Taxes