The U.S. Tax System: Inefficiency and Complexity

Joseph Bankman 3

A leading scholar in the fields of tax law and mental health law, Joseph Bankman‘s main field of research focuses on tax policy—covering topics such as progressivity, consumption tax and the role of tax in the structure of Silicon Valley start-ups. He worked with the State of California to create ReadyReturn—a completed tax return prepared by the state that is available to low-income and middle-income taxpayers. A clinical psychologist and a lawyer, he has written and spoken extensively on how we might use technology to simplify filing. In the interview that follows, he discusses the complexity of the U.S. tax system, tax returns, and tax evasion.

Isn’t the tax law too complex? Can we simplify it?
Bankman: The tax law is too complex. That leads to inefficiency, and burdens taxpayers. We could make the tax law a lot simpler, though not as simple as most people want. There are a lot of complex economic relationships, and it is hard to be simple, fair and sensible. Unfortunately, we are not going to simplify the law at all in the next few years. The partisan divide in Washington, and in the country in general, is just too great.

If we can’t or don’t simplify the law, does this mean that the average taxpayer is doomed to struggle with her tax return each year?
Bankman: Not at all.  We can simplify filing without simplifying the law. The government already has most of the information it asks us for on our tax returns.  It could simplify things by giving taxpayers or their preparers access to that information. (An op-ed to do just that has recently come out from a Stanford visitor and former Senator, Russ Feingold, and other legislators with a Stanford connection, such as Elizabeth Warren, are making similar proposals.)

What about tax evasion? Does complexity lead to evasion? 
Bankman: Tax evasion is a big problemwe lose about 500 billion dollars to tax evasion. If we collected that money, we could just about balance our budget!  As it happens, though, the biggest driver of tax evasion is opportunity, not complexity. Evasion is greatest in the cash sector. Cash businesses underreport federal income tax (which is complex) and state sales tax (which is simple).

In a recent piece, my co-authors and I talk about how some social psychology might be used to limit evasion. For example, we can change the tax return to make it psychologically harder to lie. We also talk about how we might use data to detect tax evasion.

Joseph Bankman is the Ralph M. Parsons Professor of Law and Business at Stanford Law School.