The Tax Foundation’s Options Guide for Reforming America’s Tax Code 3.0 models 86 policy changes and highlights five that would dramatically reduce the complexity of the federal tax system.
1. Eliminate the Individual and Corporate Alternative Minimum Taxes
- Individual AMT (Option 38) – in place since 1969; the CBO projects fewer than 600,000 taxpayers (≈0.3 % of returns) will pay it in 2026, but it still forces affected filers to compute tax twice, nearly doubling filing burden.
- Corporate AMT (Option 74) – created in 1986, repealed in 2018 by the TCJA, then reinstated by the Inflation Reduction Act with a different rule set. Survey data indicate it adds significant compliance costs for U.S. companies while generating modest new revenue.
- Simplification impact – removing both AMTs would eliminate parallel tax calculations and the associated administrative workload for taxpayers and the IRS. Revenue gaps could be addressed by revisiting deductions and credits that lower average tax rates.
2. Create Universal Savings Accounts (USA) – Option 39
- A single Roth‑style account would replace the current patchwork of tax‑neutral savings vehicles (401(k)s, IRAs, HSAs, FSAs, 529 plans, etc.).
- Contribution limit: $10,200 post‑tax in 2027, indexed to inflation thereafter; unused room carries forward.
- Tax treatment: earnings grow tax‑free; withdrawals are tax‑free and penalty‑free at any time for any purpose, and withdrawn amounts are added back to contribution room.
- Potential transition: phasing out existing accounts (HSAs, FSAs, 529s) would reduce paperwork for taxpayers and administrative burden for the Treasury and IRS, while enhancing neutrality by treating all savings uniformly.
3. Reform the Earned Income Tax Credit and Child Tax Credit – Option 21
| Credit | 2026 Maximum | Phase‑out thresholds |
|---|---|---|
| Child Tax Credit (CTC) | $2,200 per child | $200 k (single) / $400 k (joint) |
| Earned Income Tax Credit (EITC) – childless | $664 | Varies by filing status |
| EITC – one child | $4,427 | Varies by filing status |
- Current rules create complexity: the EITC’s qualifying‑child age limit is 18 (23 if a full‑time student) while the CTC’s limit is 16.
- The proposal separates the credits—making the EITC a pure work credit and the CTC a pure child credit—streamlining eligibility and reducing IRS administration.
4. Enact Full Expensing for All Capital Investment – Option 53
- Under full expensing, businesses could deduct the full cost of any capital asset in the year incurred, including buildings and other structures, eliminating depreciation schedules.
- Example: a $2 million building purchase would generate a $2 million immediate deduction rather than being spread over many years.
- Expected effects: lower after‑tax cost of investment, reduced paperwork and tax planning for firms, and fewer compliance demands on the IRS.
5. Integrate Corporate and Individual Tax Systems via a Dividend Deduction – Option 60
- C‑corporations would be allowed to deduct dividends paid to shareholders, removing the double taxation that currently applies (21 % corporate tax plus tax on dividends/capital gains).
- Aligns C‑corporations with pass‑through entities, which are taxed only once at the individual level, reducing distortions that influence business‑entity choice.
These five reforms illustrate how targeted changes can simplify filing requirements, lower administrative costs for both taxpayers and the government, and address longstanding inefficiencies in the U.S. tax code.
Source article: taxfoundation.org
