Candice Horbacz
The Tax Foundation has unveiled its latest comprehensive analysis, Options for Reforming America’s Tax Code 3.0, a pivotal resource modeling the economic, distributional, and revenue effects of 86 distinct modifications to the nation’s intricate tax framework. This expansive new publication delves into proposals ranging from those that promise significant simplification to others that could introduce further complexity, underscoring a critical ongoing debate within tax policy circles: how to balance revenue generation with administrative ease and economic efficiency. At its core, the Tax Foundation champions simplicity as a fundamental principle of sound tax policy, advocating for a system that is both manageable for taxpayers to navigate and straightforward for government agencies like the IRS to administer and enforce. The newly released guide highlights several key options that, if adopted, could dramatically streamline the existing tax code.
The Enduring Challenge of Alternative Minimum Taxes
Among the most prominent simplification proposals is the elimination of the Individual Alternative Minimum Tax (AMT), designated as Option 38, and the repeal of the Corporate Alternative Minimum Tax (CAMT), detailed in Option 74. These parallel tax systems were conceived as a "backstop" to ensure that high-income individuals and profitable corporations paid a minimum amount of tax, even after utilizing various deductions and credits available under the regular tax code. However, their existence necessitates taxpayers calculating their liability twice—once under the standard rules and again under the AMT—a process that has consistently been cited as a major source of complexity and administrative burden.
The individual AMT has a storied history, first enacted in 1969 amidst public outcry that a small number of wealthy individuals were paying little to no income tax due to extensive tax shelters. Over the decades, its reach expanded, catching a growing number of middle-income taxpayers due to its failure to index for inflation. While subsequent legislative efforts, notably the Tax Cuts and Jobs Act (TCJA) of 2017, significantly curtailed its impact by raising exemption amounts and phase-out thresholds, the individual AMT remains a latent complexity. The Congressional Budget Office projects that while fewer than 600,000 taxpayers—a mere 0.3 percent of all filers—will be subject to the AMT in 2026, those who are caught in its web face a disproportionate compliance burden. The National Taxpayer Advocate once starkly noted that the AMT "nearly doubles the burden of filing a federal income tax return," a testament to its labyrinthine nature.
The corporate AMT followed a similar trajectory, initially established in 1986 during another period of public dissatisfaction with low corporate effective tax rates. It too was largely repealed by the TCJA in 2017, effective 2018, as part of a broader corporate tax overhaul aimed at lowering the statutory rate and simplifying the system. However, the political pendulum swung back in 2022 with the passage of the Inflation Reduction Act (IRA), which resurrected a corporate AMT under a new set of rules, applying a 15 percent minimum tax on the adjusted financial statement income of large corporations (those with average annual adjusted financial statement income over $1 billion). Early evidence, including survey data from the Tax Executives Institute, suggests that this new CAMT has already led to significant compliance headaches for U.S. companies, generating relatively little new revenue compared to the administrative costs it imposes.
The core issue underlying both AMTs stems from a policy dilemma: lawmakers’ frustration with low average tax rates for some high-income individuals and large corporations. While sometimes low effective rates are a consequence of sound, pro-growth policies like full expensing for capital assets—which allows businesses to immediately deduct the full cost of investments, boosting productivity and wages in the long run—at other times, they result from specific tax preferences (credits and deductions) enacted by Congress. Rather than directly addressing these preferences, which often serve specific policy goals or constituencies, Congress has historically opted for the parallel AMT system, inadvertently layering complexity upon complexity. Eliminating both individual and corporate AMTs, as proposed in the Options Guide, would dismantle these convoluted parallel tax regimes, offering a clear path to simplification. Policymakers could then address revenue gaps by directly evaluating and reforming the underlying deductions and credits that contribute to lower average tax rates, fostering a more transparent and efficient tax structure.
Streamlining Savings: The Universal Savings Account Proposal
Another area ripe for simplification, as highlighted in Option 39, is the current patchwork of tax-advantaged savings vehicles. The U.S. tax code is replete with various accounts designed to encourage specific types of saving, each with its own unique set of contribution limits, withdrawal rules, tax treatments (pre-tax, post-tax, tax-deferred), and eligibility requirements. While popular options like 401(k) plans and Individual Retirement Accounts (IRAs) are widely recognized, the landscape also includes Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), 529 college savings plans, Coverdell Education Savings Accounts, Archer MSAs, and numerous other specialized accounts.
The proliferation of these accounts has created an administrative labyrinth for taxpayers, requiring meticulous record-keeping, tracking, and account maintenance. This complexity is compounded by differing age restrictions, income limitations, and penalty structures for non-qualified withdrawals. For the Internal Revenue Service (IRS) and the Treasury Department, administering and enforcing these diverse rules presents a significant burden, diverting resources that could otherwise be used for more impactful tax administration. Furthermore, this fragmented approach often violates the principle of neutrality, as it provides preferential tax treatment only to certain forms of saving (e.g., for retirement, healthcare, or education), while other types of saving remain subject to higher effective tax rates. This can distort economic decisions, encouraging individuals to save in ways that are tax-advantaged rather than economically optimal for their specific needs.
In recent years, members of Congress from both sides of the aisle have continued to propose even more specialized savings accounts, including those for first-time homebuyers, lifelong skills development, and disaster mitigation. While well-intentioned, each new account adds another layer to an already intricate system.
The Tax Foundation’s proposal for Universal Savings Accounts (USAs) offers a compelling solution. This option advocates for establishing a Roth-style USA, allowing individuals to contribute a specified amount—e.g., $10,200 post-tax in 2027, indexed to inflation—with unused "contribution room" carrying forward to subsequent years. Critically, earnings on these contributions would grow tax-free, and withdrawals could be made at any time, for any reason, without penalty or further taxation. Moreover, withdrawn amounts would be added back to the contribution room, allowing for a flexible, "use it or lose it" approach to saving. To achieve maximum simplification, the proposal suggests phasing out existing specialized accounts like HSAs, FSAs, and 529 plans, carefully managing the transition to avoid disrupting current savers. This consolidation would dramatically reduce paperwork, enhance transparency, and promote neutrality across all forms of saving, empowering individuals with greater flexibility and reducing the compliance burden for millions of Americans.
Reforming Social Support: EITC and Child Tax Credit Adjustments
The U.S. tax code also utilizes two significant credits aimed at supporting families and low-income workers: the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). While both serve vital social and economic functions, their current structures, detailed in Option 21 of the guide, have introduced considerable complexity.
As it stands, parents can claim a CTC of up to $2,200 per child in 2026, with the credit beginning to phase out for single filers earning over $200,000 and joint filers exceeding $400,000 annually. The EITC, designed to reward work and alleviate poverty, is available to low-income parents and childless workers alike, but its parameters vary significantly based on filing status and the number of qualifying children. While the EITC’s original intent was to incentivize employment, its current design means it effectively functions as a second child credit, with the maximum credit for a taxpayer with one child ($4,427) being substantially larger than the maximum childless credit ($664).
This dual functionality, coupled with disparate phase-in and phase-out rules for both credits, and highly complex "qualifying child" rules, creates a significant source of confusion for taxpayers. Compounding this administrative headache is the inconsistency in age eligibility: children are eligible for the EITC through age 18 (or 23 if a full-time student), but only through age 16 for the CTC. These discrepancies lead to errors, necessitate extensive guidance from the IRS, and increase the likelihood of incorrect claims, placing additional strain on both taxpayers and the tax agency.
The Tax Foundation’s proposed reform seeks to disentangle these credits, making one strictly a work credit and the other solely a child credit. This structural clarity would simplify compliance, reduce errors, and ensure that each credit effectively achieves its primary policy objective without overlapping complexities. By aligning eligibility criteria and simplifying the phase-in/phase-out mechanisms, this reform promises to make these critical social support programs more transparent and easier to access for eligible families, while also streamlining IRS administration.
Boosting Investment: Universal Full Expensing for All Capital Investment
A cornerstone of pro-growth tax reform, presented as Option 53, is the enactment of full expensing for all capital investment. Under a theoretical cash flow tax, businesses would immediately deduct all expenses incurred in the course of doing business, including capital investments. However, the current U.S. tax code deviates significantly from this ideal. While certain expenses, such as wages and the purchase of machinery and equipment, are often fully deductible in the year they are incurred, buildings and other long-lived structures are subject to complex depreciation schedules, requiring their cost to be spread out over many years.
Depreciation rules, which vary based on asset type, industry, and acquisition date, create a web of complexity for businesses. Companies must meticulously track the "useful life" of each asset, applying specific formulas to determine how much of its cost can be deducted each year. This not only generates significant paperwork and necessitates intricate tax planning but also increases the after-tax cost of investing in certain assets. Economically, delaying deductions for capital expenditures is akin to taxing investment, as it reduces the present value of future deductions. This disincentivizes capital formation, leading to less investment, slower productivity growth, and ultimately, lower wages.
Full expensing, in contrast, allows businesses to immediately deduct the entire cost of a capital asset in the year it is placed in service. This eliminates the need for complex depreciation schedules, treating all capital expenditures like any other business expense. A $100 investment would consistently lead to a $100 deduction. The economic benefits are substantial: by removing the tax bias against investment, full expensing encourages businesses to upgrade technology, expand facilities, and invest in new equipment. This boost in capital stock enhances worker productivity, drives innovation, and fosters economic growth. While it may appear to reduce tax revenue in the short term, economists largely agree that it leads to higher tax revenues in the long run due to a larger, more dynamic economy. The TCJA introduced temporary full expensing for certain short-lived assets, demonstrating congressional recognition of its benefits, but making it permanent and universal across all capital assets, including structures, would represent a profound simplification and economic stimulus.
Addressing Double Taxation: Corporate and Individual Tax System Integration
The final major simplification option explored, Option 60, addresses a long-standing inefficiency in the U.S. tax system: the double taxation of C corporations. While the vast majority of businesses in the U.S. are "pass-through" entities—sole proprietorships, partnerships, S corporations, and Limited Liability Companies (LLCs)—whose profits are taxed only once at the individual owner’s level, C corporations face a different reality. Their income is taxed first at the corporate level (currently at a 21 percent federal rate) and then again at the shareholder level when profits are distributed as dividends or realized as capital gains upon the sale of stock.
This dual taxation creates a significant distortion, favoring pass-through entities and potentially discouraging investment in C corporations. It incentivizes businesses to choose their legal structure based on tax implications rather than optimal business form, and it can lead to inefficient allocation of capital. Economically, double taxation can depress corporate valuations, reduce dividend payouts, and encourage companies to retain earnings or engage in debt financing over equity, even when equity might be more appropriate.
The Tax Foundation’s proposal to integrate the corporate and individual tax systems through a dividend deduction offers a direct solution to this problem. By allowing C corporations to deduct the dividends they pay to shareholders, the proposal effectively eliminates the second layer of taxation on distributed profits. This means that income earned by a C corporation would ultimately be taxed only once, at the shareholder level, similar to how pass-through income is treated. This reform would level the playing field between different business structures, reducing distortions in capital markets and promoting more efficient investment decisions. It would simplify compliance for businesses by removing the need for complex tax planning around dividend distribution and retention policies, and it would bring the U.S. closer to a unified business tax system with a single set of rules and rates, enhancing transparency and fairness across the corporate landscape.
The Broader Quest for a Simpler Tax Code
In recent years, Congress has indeed enacted some significant simplifying tax reforms, most notably many of the individual and business provisions within the TCJA. However, the overarching trend has seen the U.S. tax code grow progressively more complex. The constant introduction of new carve-outs, specialized savings vehicles, targeted tax credits, and adjustments to existing provisions contribute to an ever-expanding rulebook. Each new policy, often designed to address a specific economic or social issue, layers additional requirements and exceptions onto the existing structure, increasing compliance costs for taxpayers and administrative burdens for the IRS.
The reforms outlined in the Options Guide serve as a powerful testament to the feasibility of pursuing a simpler tax code—one that promises fewer burdens on both the individuals and businesses who pay taxes, and the government agencies tasked with collecting them. By tackling fundamental sources of complexity—such as parallel tax systems, fragmented savings accounts, overlapping social credits, inefficient depreciation rules, and the double taxation of corporate income—policymakers have the opportunity to create a more transparent, efficient, and equitable tax environment. While the political will to enact such sweeping changes can be elusive, analyses like those presented by the Tax Foundation are crucial for informing public debate, highlighting the economic benefits of simplification, and charting a course towards a more coherent and user-friendly tax system for America.
Note: Reform options presented within Options for Reforming America’s Tax Code 3.0 illustrate the economic, revenue, and distributional tradeoffs of each tax option and are not necessarily endorsed or opposed by Tax Foundation.
