Improving Tax Systems

Over the years, we see numerous federal and state tax law changes such as adding or modifying a credit, deduction or exclusion. We sometimes see rate cuts and increased deductions, such as most individuals experienced for 2018 through 2025 with the Tax Cuts and Jobs Act of 2017 changes that lowered the individual rates, almost doubled the standard deduction (which 70% of individuals used prior to 2018; today abut 90% claim it), and the child tax credit was doubled from $1,000 to $2,000. But there were numerous other TCJA changes many of which only affect the top 10% of taxpayers or even the top fraction of the top 1% of individual taxpayers (such as an almost $14 million estate tax exemption per person for 2025).

What was the purpose of those changes? Mainly it was to improve the international competitiveness of the U.S. corporate tax system. So, why any individual tax changes?  Well, people tend to favor individual tax cuts rather than corporate tax cuts (see this Pew Research poll among others). At the state level, what is the purpose of yet one more sales tax exemption or a new exclusion from income tax?

What about review and reform of the entire tax system? Well, it is a big project, but not an impossible one. It requires a good look at how much revenue is needed (where does the government need to spend money and what are public goods and services that warrant use of tax revenues), what should the mix of taxes be, and should certain spending be done through the tax law like we have today via special deductions, exclusions, credits and rates, or done directly and more transparently?

In a January 2025 Tax Notes State article, I suggest the need to look at four areas that tend to be overlooked in discussions of tax law changes, but that would improve tax systems if considered:

1. Articulate and use the jurisdiction's economic, societal and environmental goals.

2. Identify what tax revenues should pay for and how (directly via payments and grants or by the government paying form them directly or by reductions in recipient's tax bills via special deductions, exclusions, credits and rates?

3. Find missing voices and data.  For example, while a sales tax exemption for infant diapers might sound like something to help low income taxpayers, if higher income people spend more on diapers, they get the bulk of this tax break or subsidy?  Why do we have a $1 million limit on the debt to produce deductible mortgage interest for itemizers (since 1987 although only $750K for 2018 through 2025) when the median home sales price in December 2024 in the U.S. today is only $427,000 (Census Bureau data)?  Most likely because the drafters of this tax rule have far more expensive homes with large mortgages.

4. Provide tax transparency and tax literacy.  Provide the detailed reasons for tax changes, who is affected including breaking it down by income groups including breaking it down for the wide range of income levels comprising the top 1% of individuals. Find ways to help individuals understand their own taxes (such as covering it in high school civics classes) and understand how spending occurs through our tax system and how it compares to the direct spending you can see in looking at budgets of government agencies.

I encourage you to read the article - Overlooking Considerations That Could Improve Tax Systems.

What do you think?