Candice Horbacz
The Tax Foundation, a leading independent tax policy research organization, has released its latest comprehensive guide, Options for Reforming America’s Tax Code 3.0. This seminal publication undertakes a rigorous analysis, modeling the economic, distributional, and revenue implications of 86 distinct modifications to the U.S. tax code. The book serves as a critical resource for policymakers, researchers, and the public, presenting a diverse array of potential reforms ranging from measures designed to streamline and simplify the existing system to those that might introduce additional layers of complexity. At its core, the Tax Foundation champions principles of sound tax policy, with "simplicity" being a paramount objective—advocating for a tax code that is easily understood by taxpayers, straightforward for them to comply with, and efficient for governmental bodies like the Internal Revenue Service (IRS) to administer and enforce. The intricate web of current tax laws often presents significant hurdles, and the Options Guide highlights several key areas where strategic reforms could drastically reduce this burden.
Untangling the Alternative Minimum Tax: A Persistent Source of Complexity
Among the most significant simplification proposals in Options 3.0 are the elimination of the individual Alternative Minimum Tax (AMT) and the repeal of the corporate Alternative Minimum Tax (CAMT), identified as Option 38 and Option 74, respectively. Both AMTs represent parallel tax systems, requiring taxpayers to calculate their liability twice—once under the regular income tax rules and again under the AMT—and pay the higher of the two amounts. This dual calculation inherently adds a substantial layer of complexity, demanding additional record-keeping, specialized tax software, and often professional assistance, effectively doubling the burden for those subject to it.
The origins of the individual AMT trace back to 1969. Public and congressional outcry arose after reports revealed that a small number of high-income individuals were utilizing various deductions and credits to reduce their federal income tax liability to zero. In response, Congress enacted the individual AMT, intending to ensure that all high-income taxpayers paid at least a minimum amount of tax. Over the decades, its reach expanded significantly, largely due to inflation pushing more middle-income taxpayers into its grasp until inflation indexing was finally introduced. Subsequent legislation, most notably the Tax Cuts and Jobs Act (TCJA) of 2017 and later adjustments, substantially limited the AMT’s impact by increasing exemption amounts and phase-out thresholds. The Congressional Budget Office (CBO) projects that by 2026, fewer than 600,000 taxpayers—a mere 0.3 percent of all returns—will be subject to the individual AMT. Despite its diminished scope, the National Taxpayer Advocate once famously noted that the AMT "nearly doubles the burden of filing a federal income tax return" for those it affects, underscoring its disproportionate impact on administrative complexity.
Similarly, a corporate AMT was first established in 1986, driven by concerns that profitable corporations were paying little to no federal income tax due to various deductions and credits. This corporate AMT was repealed by the TCJA in 2018 as part of a broader effort to simplify corporate taxation and lower the statutory rate. However, the concept resurfaced with the passage of the Inflation Reduction Act (IRA) in 2022, which reinstalled a new corporate AMT (CAMT) targeting large corporations with average annual adjusted financial statement income exceeding $1 billion. This iteration of the CAMT operates under a distinct set of rules, primarily taxing a corporation’s "book income" rather than its tax income, leading to significant accounting and compliance challenges. Surveys by organizations like the Tax Executives Institute have indicated that the new CAMT has imposed substantial compliance burdens on U.S. companies while generating relatively little new revenue, leading to questions about its effectiveness and justification.
The Tax Foundation’s proposal to eliminate both individual and corporate AMTs is rooted in the conviction that these parallel tax systems are inherently inefficient and unnecessarily complex. While they were created to address concerns about low effective tax rates, the Foundation argues that a more direct approach would be to reform or eliminate the specific tax preferences—deductions and credits—that lead to those low rates in the first place. This would tackle the root cause of the perceived inequity without introducing a convoluted shadow tax system. Repealing the AMTs would simplify tax preparation for millions of individuals and businesses, reduce administrative costs for the IRS, and foster a more transparent tax landscape.
Streamlining Savings: The Case for Universal Savings Accounts
Another area ripe for simplification, as highlighted by Option 39, is the labyrinthine landscape of tax-advantaged savings accounts. The current U.S. tax code is replete with a multitude of savings vehicles, each designed with specific purposes and governed by its own unique set of rules regarding contributions, withdrawals, eligibility, and tax treatment. While popular options like 401(k) plans and Individual Retirement Accounts (IRAs) are widely recognized, the universe of such accounts extends to Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), 529 education savings plans, Coverdell Education Savings Accounts, ABLE accounts for individuals with disabilities, and various other specialized vehicles. This proliferation has led to an "alphabet soup" of options, often leaving individuals confused about which accounts are best suited for their needs, how to manage them, and how to navigate the intricate compliance requirements.
The complexity is further compounded by recent legislative proposals from both sides of the aisle, which have sought to introduce even more specialized savings accounts for purposes such as first-time homebuyer assistance, lifelong skills-building, and disaster mitigation. While each new account may address a specific policy goal, the cumulative effect is a system that imposes immense paperwork, tracking, and account maintenance burdens on taxpayers. It also strains the administrative capacity of the IRS and the Treasury Department, which must oversee and enforce these disparate rules. Moreover, this fragmented approach violates a core principle of sound tax policy: neutrality. By offering preferential tax treatment only to certain types of saving (e.g., retirement, education, health), the current system distorts individuals’ financial decisions and imposes higher effective tax rates on other forms of saving or investment, hindering optimal capital allocation.
Option 39 proposes a radical simplification: the establishment of Roth-style Universal Savings Accounts (USAs). Under this model, individuals would be permitted to contribute a set amount annually (e.g., $10,200 post-tax in 2027, indexed for inflation) to a USA. Crucially, these accounts would offer tax-free growth, and withdrawals could be made at any time, for any reason, without penalty or further taxation. Unused "contribution room" could also be carried forward to subsequent years, providing flexibility. The simplicity of a USA lies in its versatility and ease of use: a single account could serve multiple savings goals—retirement, a down payment, emergency funds, or education—without the need to understand and comply with different rules for each. To fully realize the simplifying potential, the proposal suggests that Congress could gradually phase out many of the existing specialized savings accounts, carefully managing the transition to protect existing balances and ensure a smooth shift for taxpayers. This move would not only alleviate administrative burdens but also promote greater financial literacy and empower individuals with more flexible savings options, potentially boosting overall savings rates by making the process less daunting.
Reforming the EITC and CTC: Clarity in Family and Work Support
The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are two of the largest federal tax benefits aimed at supporting low- and middle-income families, yet their overlapping and often contradictory rules create significant complexity for taxpayers and administrative challenges for the IRS. Option 21 in the Options Guide proposes a structural reform to disentangle these credits, making one strictly a work credit and the other solely a child credit, thereby enhancing clarity and efficiency.
Currently, parents can claim a CTC of up to $2,200 per child in 2026, which begins to phase out for single filers earning over $200,000 and joint filers over $400,000. The EITC, established in 1975 under the Ford administration to offset the burden of Social Security taxes and encourage work, also provides substantial benefits, particularly for families with children. Its value varies significantly based on filing status and the number of qualifying children, effectively functioning as a "second CTC" for many low-income families. For instance, the maximum childless credit is a relatively modest $664, whereas a taxpayer with one child could receive up to $4,427.
The primary source of complexity arises from the differing phase-in and phase-out schedules, varying income thresholds, and, crucially, distinct definitions and age limits for a "qualifying child." Under the EITC, a child can qualify up to age 18 (or 23 if a full-time student), while for the CTC, the age limit is 16. These discrepancies force taxpayers to navigate intricate rules, often leading to confusion, errors, and difficulties in compliance. The IRS itself faces a significant administrative burden in verifying eligibility for these credits, which are frequently associated with high rates of improper payments due to their complexity. The temporary expansion of the CTC under the American Rescue Plan in 2021 further highlighted the political and logistical challenges of these credits, sparking debates over refundability and work requirements.
The Tax Foundation’s proposed reform aims to simplify this landscape by clearly separating the functions of these two vital credits. The EITC would be recalibrated to exclusively serve as a work incentive, focusing on rewarding labor force participation irrespective of family size. Concurrently, the CTC would be streamlined to function solely as a child-related benefit, providing direct support to families with children. While the exact parameters of the reformed credits (e.g., credit amounts, phase-in/out rates) would need careful calibration to ensure equitable outcomes and maintain fiscal responsibility, the fundamental structural change would alleviate much of the current confusion. This clearer delineation would simplify tax preparation for millions of families, reduce the likelihood of errors, and enhance the administrative efficiency of the IRS, ensuring that each credit more effectively achieves its distinct policy objective of supporting work or families.
Unlocking Investment: The Power of Full Expensing
One of the most impactful pro-growth reforms detailed in Options 3.0 is the enactment of full expensing for all capital investment (Option 53). This proposal targets a fundamental distortion in the current U.S. tax code that discourages business investment and hinders economic growth: the depreciation system.
Under an idealized cash flow tax system, businesses would be permitted to immediately deduct all expenses incurred in the course of doing business, including the full cost of capital assets. However, the U.S. tax code deviates significantly from this ideal. While certain expenses, such as wages, materials, and some machinery and equipment, are often fully deductible in the year they are incurred or purchased, the cost of long-lived assets like buildings, structures, and some intellectual property must be "depreciated" over many years according to complex schedules. Depreciation is an accounting method that spreads the cost of an asset over its estimated useful life, allowing businesses to deduct only a fraction of the asset’s cost each year.
This system of depreciation introduces several problems. Firstly, the various sets of rules governing depreciation and amortization are incredibly complex, requiring extensive record-keeping, specialized accounting, and ongoing tax planning for businesses. This complexity translates into increased compliance costs and administrative burdens for both businesses and the IRS. Secondly, and more critically from an economic perspective, delaying deductions reduces their real value due to inflation and the time value of money. A dollar deducted today is worth more than a dollar deducted five or ten years from now. This effectively raises the after-tax cost of investing in assets that must be depreciated, creating a bias against long-term capital investment. As a result, businesses invest less than they would in a neutral tax environment, leading to slower capital formation, reduced productivity growth, lower wages, and fewer job opportunities.
The TCJA of 2017 took a step towards full expensing by allowing 100 percent bonus depreciation for most short-lived capital investments, but this provision is temporary and is scheduled to phase out. The Tax Foundation’s Option 53 proposes making full expensing permanent and expanding it to all capital assets, including structures. Under this reform, a $100 investment would consistently result in a $100 deduction in the year of purchase, regardless of the asset type.
Economists widely agree that full expensing is a pro-growth reform. By removing the tax penalty on investment, it encourages businesses to invest more in new technology, equipment, and facilities. This increased capital stock boosts worker productivity, which in turn drives up real wages and creates more robust economic growth. While full expensing might lead to an immediate, short-term reduction in federal revenue, dynamic scoring models typically show that the long-term economic benefits—from a larger tax base and increased economic activity—can largely offset these initial revenue losses. Furthermore, it simplifies the tax code by eliminating the need for convoluted depreciation schedules, making tax compliance significantly easier for businesses of all sizes.
Integrating Corporate and Individual Taxes: Eliminating Double Taxation
The U.S. tax system currently operates with two distinct approaches to taxing business income, leading to inefficiencies, distortions, and unnecessary complexity, as addressed by Option 60: integrating the corporate and individual tax systems through a dividend deduction.
While the largest and most publicly visible companies are typically C corporations, the vast majority of businesses in the U.S. are actually "pass-through" entities, such as sole proprietorships, partnerships, S corporations, and Limited Liability Companies (LLCs). These pass-through businesses derive their name from the fact that their profits are not taxed at the entity level. Instead, the profits "pass through" directly to the individual owners, who then report and pay taxes on that business income on their individual income tax returns. This results in a single layer of taxation for pass-through business income.
C corporations, however, face a different fate. Their profits are taxed once at the corporate level (currently at a 21 percent federal rate), and then, when these after-tax profits are distributed to shareholders as dividends or realized through capital gains upon the sale of stock, they are taxed again at the individual shareholder level. This phenomenon, known as "double taxation," means that the same dollar of corporate income is subjected to two distinct layers of tax.
This dual system creates several distortions. Firstly, it encourages businesses to choose their legal structure not necessarily based on optimal operational or governance considerations, but largely based on tax implications. This can lead to inefficient business formation. Secondly, double taxation discourages equity financing (issuing stock) relative to debt financing (borrowing), as interest payments on debt are generally deductible at the corporate level, effectively avoiding the corporate tax. Thirdly, it can incentivize C corporations to retain earnings rather than distribute them as dividends, even when distribution might be economically more efficient, to defer the second layer of tax.
Option 60 proposes a straightforward method to address this double taxation: allowing C corporations to deduct the dividends they pay to their shareholders. This effectively shifts the entire tax burden for that income to the individual shareholder level, mirroring the treatment of pass-through income. By permitting this dividend deduction, C corporations would effectively face only one layer of taxation on distributed profits, bringing their tax treatment much closer to that of pass-through entities.
The benefits of such an integration are multifaceted. It would reduce the tax-induced distortions in business organizational form, allowing companies to choose structures based on genuine business needs rather than tax arbitrage. It would also promote greater neutrality between debt and equity financing, fostering more efficient capital markets. Furthermore, by creating a more level playing field between different business structures, it simplifies the overall tax code and enhances the competitiveness of U.S. corporations, potentially attracting more investment. While careful consideration of revenue impacts and transitional rules would be necessary, this reform represents a significant step towards a more coherent and economically efficient business tax system.
A Broader Vision for Tax Simplicity
The reforms outlined in the Tax Foundation’s Options for Reforming America’s Tax Code 3.0 underscore a critical ongoing challenge in U.S. fiscal policy: the persistent trend towards an increasingly complex tax code. Despite significant legislative efforts in recent years, such as many of the individual and business provisions within the Tax Cuts and Jobs Act (TCJA) which aimed at simplification, the overall trajectory has been one of growing intricacy. The continuous introduction of new tax carveouts, specialized savings vehicles, and targeted tax increases, often driven by specific policy objectives or political expediency, threatens to exacerbate this complexity further.
The cumulative burden of this complexity extends far beyond mere inconvenience. For individual taxpayers, it translates into countless hours spent on tax preparation, increased reliance on costly professional assistance, and a heightened risk of errors or non-compliance. For businesses, it diverts resources from productive investment towards tax planning and compliance, hindering growth and innovation. For the IRS, it strains an already underfunded and often technologically outdated administrative apparatus, making effective enforcement and service delivery more challenging.
The Options Guide serves as a powerful testament that this trend is not inevitable. By meticulously modeling reforms such as eliminating parallel tax systems (AMTs), consolidating disparate savings accounts into a single universal option, clarifying the distinct roles of key family and work credits, enacting full expensing for all capital investment, and integrating corporate and individual tax systems, the Tax Foundation demonstrates a clear pathway towards a simpler, more neutral, transparent, and economically efficient tax code. These data-driven options offer policymakers a tangible roadmap to reduce the compliance burdens on taxpayers, streamline government administration, and ultimately foster a more robust and equitable economic environment for all Americans. The call for simplification is not merely an appeal for convenience; it is a fundamental argument for a tax system that supports economic prosperity and maintains public trust.
