Attractive Complexity: Tax Deregulation, the Check-the-Box Election, and the Future of Tax Simplification

Political failure has long been the scapegoat for the increasing complexity of the income tax. Over the last few decades, confusion over the meaning of the term simplification appears to have become a second important obstacle to creating simpler tax laws. Because some tax complexity is attractive to taxpayers, relying on taxpayer preferences to identify complexity and to guide simplification efforts has produced reforms and proposals that promise simplification but instead deliver pro-taxpayer deregulation that may cause more of society\u27s resources to be devoted to paying, minimizing and collecting taxes rather than less. The check-the-box election, which provided taxpayers with greater flexibility to choose and change the classification of business entities while having only an ambiguous impact on the tax law\u27s complexity, offers a clear example of the misidentification of a deregulatory reform as a simplification reform. The simplification proposals offered by the bipartisan tax reform panel in 2005 would have done an equally poor job of simplifying the tax law. A rational taxpayer will always embrace a complex tax rule when its economic costs (e.g. $100 in time and legal fees) are more than offset by tax benefits the rule facilitates (e.g. $101 in tax savings). Although that rule\u27s complexity is attractive to taxpayers, it still consumes $100 of society\u27s resources. To prevent attractive complexity from transforming tax simplification into tax deregulation, it is important to adopt an objective approach to identifying and measuring complexity. Recognizing that rational taxpayers will sometimes prefer complexity over simplicity will help prevent attractive complexity from undermining the success of efforts to simplify the tax law