Tax Administration

In recent years, many proposals have been made to overhaul the federal income tax system. To help Congress evaluate how tax reform would affect tax administration and the burdens taxpayers face in complying with the tax laws, GAO studied the basic design features of several kinds of tax systems. The generic systems that GAO studied are a national retail sales tax, two types of value-added taxes, a flat tax, a personal consumption tax, and several versions of broad-based income taxes. This report describes (1) the major design differences among the alternatives GAO studied and (2) how the alternatives, by incorporating different design features, may affect the taxpayers' burden of complying with the tax laws and the government's responsibilities for administering them.

GAO noted that: (1) the alternative tax systems that GAO studied differ in their potential impacts on taxpayer compliance burden and tax administration; (2) the different potential impacts of the tax systems can largely be explained by four basic design features: (a) the basis for taxation; (b) the type of taxpayer; (c) preferential tax treatment for certain individuals, businesses, or goods and services; and (d) the rate structure for individuals; (3) the differences in the four basic design features of the tax systems GAO studied explain in large part the differing potential impacts of the tax systems on taxpayer compliance burden and tax administration; (4) simplifying the determination of tax liability for taxpayers could simplify assessing compliance and providing taxpayer assistance for tax administrators; (5) tax systems that would tax only businesses, rather than individuals and businesses, could reduce taxpayer compliance burden and the costs of tax administration by greatly reducing the number of taxpayers required to file returns; (6) tax systems that combine a business tax with a relatively simple individual tax, such as flat tax or some version of a reformed income tax, could add limited burden relative to a business-only tax; (7) tax systems requiring individuals to report more information about their personal finances could add more burden than a business tax combined with a simple individual tax because more individuals could have to file tax returns and the returns would be more complicated; (8) an alternative tax system incorporating tax preferences--exemptions, special deductions, credits, or multiple rates on goods and services aimed at various economic and social goals--would generally add complexity; (9) tax preferences generally increase taxpayer compliance burden by complicating the determination of tax liability, adding recordkeeping requirements, and creating incentives to engage in tax planning; (10) tax preferences generally increase taxpayer compliance burden by complicating the determination of tax liability, adding recordkeeping requirements, and creating incentives to engage in tax planning; (11) tax systems with multiple tax rates for individuals, which could include income taxes and a personal consumption tax, do not need to add burden to taxpayers' calculation of tax liability compared to single-rate systems; and (12) in addition to impacts due to the four basic design features, the transition to an alternative tax system could affect taxpayer compliance burden and tax administration.