If President-electDonald Trump is able to appoint billionaire Elon Musk and former Republican presidential candidate Vivek Ramaswamy to oversee a Department of Government Efficiency (actually a nongovernment advisory group), one of Musk’s stated interests (which aligns with Trump’s) is to simplify the tax code.
Musk claimed in a post on X (formerly Twitter) that doing so would “increase productivity” instead of “incentivizing bizarre tax-avoidance behavior.” Based on things both Trump and Musk have said on Trump’s campaign trail, likely this would look like a federal flat tax, with only a couple of tax levels based on income, instead of the current seven tax brackets currently in place.
While there are pros and cons to a simplified tax code and filing system, one of the benefits, according to Anna Yen, a chartered financial analyst and contributing author to MoneyLion.com, is that it could simplify filing and other tax hassles, such as compliance costs, “making tax filing more convenient and less expensive for individuals and businesses.”
She said that such a simplification “reduces errors and saves time on tax preparation.” It would also plug loopholes that allow sophisticated taxpayers to exploit ambiguities and potentially increase fairness and compliance.
However, simplifying the tax code could also eliminate many deductions and credits that benefit specific groups, such as low-income families or those with high medical expenses, Yen pointed out.
“Consequently, it leads to higher tax burdens for some individuals. Moreover, the transition to a new system can be complex and disruptive, requiring adjustments from taxpayers and the IRS,” she said.
Even the middle class relies upon numerous deductions from such things as mortgage interest, homeownership, student loan interest and more, which a tax code simplification could remove, she said.
With a new system to streamline everything, refunds could depend on further integration of withholding, according to David Milo, CFP and owner of Independent Lending.
While this ends what Milo called the “forced savings that many Americans depend on,” it also could mean you’re taking home more income in your paychecks for the majority of the year.
“It could be quite beneficial due to the nature of financial planning though it could dampen the psychological benefits of one-off refunds,” he said.
The average middle-class American could benefit greatly from the proposed simplified tax code as it allows for a more straightforward filing process, Yen said. On the other hand, those lost deductions as mentioned above might not feel like a worthy trade.
Low-income individuals could face the worst effects of a tax code simplification, especially if they remove credits like the earned income tax credit, Yen said.
However, she said, wealthy Americans could also encounter fewer opportunities to avoid tax. “At the same time, [all Americans] can benefit from lower overall tax rates, especially if the simplification includes rate reductions.”
While perhaps not as exciting to the average American, the pros of a flat tax model can include simplicity and transparency by making the math of calculating the tax a little easier for everyone, according to Tasha Preisner, tax expert and managing partner at DeMar Consulting Group.
“It can incentivize people to work more if they don’t feel like they will be penalized by going up a tax bracket and owing more in taxes, which can promote economic growth. It can sometimes reduce loopholes, which, depending on who you are, might be a pro or a con. Some people argue that it is fairer and more equal.”
A con of this approach, Preisner explained, is “if you lower the tax rate for high-income earners, there could be potential revenue loss for balancing the budget.” This could mean a removal of the tax incentive to donate to charitable causes and nonprofit organizations.
Furthermore, Preisner pointed out that drastically changing the tax code could cause “a large disruption to our fragile financial ecosystem and bring most things to a complete standstill while the changeover happens.” She said that some critics of the flat tax model believe that the end result “will exacerbate the wealth gap since the wealthy will save more on their taxes than those under the poverty line.”
While all of this sounds rather alarming, Yen suggested not to stress too much yet. “The changes can take several years to implement because the process involves drafting new legislation, passing it through Congress, and allowing sufficient time for the IRS and the taxpayers to adjust to the new system.” All in all, the total implementation could easily be a multiyear process.
