Since Inauguration Day, the White House has led what the Washington Post calls a “vast deregulatory effort” to streamline or remove thousands of unproductive, overreaching regulations.
On a parallel track, the House and Senate are completing the One, Big Beautiful Bill Act (OBBBA) that will avoid a $4.5 trillion tax hike. What do these efforts have in common? Working together, regulatory reform and tax reform can mutually strengthen each other’s chances of success.
Federal regulations now cost Americans 12.3 billion hours annually to comply with and more than $188 billion in out-of-pocket expenses, according to the White House Office of Information and Regulatory Affairs (OIRA). These costs don’t include the dollar value of those billions of hours wasted. Just undoing the Biden Administration’s regulatory onslaught, which the American Action Forum estimates to be 1,167 final rules costing $1.8 trillion and 355 million hours to the economy, will alone be a big task.
But these efforts will only shave a tip off the regulatory iceberg because two-thirds of the 12.3 billion hours Americans spend complying with federal regulations is spent on IRS regulations, at an annual cost of $546 billion, according to Tax Foundation estimates.
Yet, as National Taxpayers Union Foundation noted, the actual burden is even higher, because “the IRS has not complied with statutory requirements to assess this cost across its full inventory of tax forms.” One culprit, the 1099-B form for reporting broker and barter transactions, imposes 2.2 billion hours, but the government has no estimate of the out-of-pocket costs associated with it.
Broadening the tax base while lowering tax rates, which is proven pro-growth tax policy, also happens to be a blueprint for tax simplification.
A simpler tax code would give taxpayers something equally valuable: peace of mind that their rights are more secure. Opaque, byzantine, and arbitrary laws are all enemies of civil liberties. They make it difficult for citizens to not only understand their obligations, but also to challenge their government when they believe they are in the right.
Tax simplification would have yet another benefit to the government itself: a diminished administrative workload. The IRS has become a super-agency managing everything including health care, climate change, childcare, and income support. It is no wonder why it is failing in key customer service and technology modernization metrics.
Congressional Republicans have already pared back an $80 billion windfall given to the IRS in 2022 because the cash infusion was poorly structured and biased toward heavy-handed enforcement initiatives. Also, the Service’s workforce has decreased by at least 11% since January, with more reductions on the way.
In this environment, giving the IRS less to do is especially imperative. A simpler tax code would reduce the number of taxpayer inquiries to the IRS, would make disputes between the government and citizens less complicated, and would allow the IRS to improve the clarity and quality of its own rulemakings.
But how can tax simplification become a reality as OBBBA nears completion?
The latest Joint Committee on Taxation report lists 181 deductions, exemptions, and credits in the code with a total value of $2 trillion in exempted taxes. Some of these provisions are good policy and good economics, such as allowing full and immediate expensing for business investments and preventing double-taxation of retirement investments through 401(k)s.
But others are more clearly carveouts that distort the economy, among them the roughly two dozen green energy tax preferences the Inflation Reduction Act of 2022 added or expanded.
Another is the personal deduction for state and local taxes (SALT), which in 2017 was wisely limited in favor of policies that provide broader tax relief. Among other things, this tradeoff gave Congress the revenue needed to double the standard deduction (reducing the number of taxpayers who itemize from 26% in 2017 to just 9% now), and nearly ending the hideously complex Alternative Minimum Tax (which plagued 5 million filers in 2017 versus about 250,000 today).
While lawmakers trim the tax code, they should be wary of new complexity, through long phaseouts, temporary cost recovery provisions, and administratively awkward proposals to exempt tips and overtime from tax. The House and Senate versions of OBBBA each have advantages and disadvantages in this regard.
This is why lawmakers must consider how any new tax policy will impact compliance costs and IRS enforcement efforts. Congress routinely waives or minimizes rules requiring a Tax Complexity Analysis prior to a vote; these rules should be strengthened.
Policymakers on both ends of Pennsylvania Avenue should recognize that tax and regulatory reform go hand in hand. In doing so, they can propel both goals across the finish line.
