Abstract - Much criticism of the income tax involves administration: the enormous complexity of the system is responsible for large compliance costs, public and private, and the tax gap is large despite substantial resources devoted to enforcement. The desire for simplification and improved compliance motivates various incremental reforms as well as proposals for fundamental restructuring of the tax system. But evaluation of such changes is difficult because the underlying problems have not been analyzed in terms of the equity and efficiency concerns that animate more familiar assessments of income tax policy. This article provides a framework for a unified analysis, in which the same factors that are used to justify the choice of the tax base and the rate structure are employed to resolve problems involving complexity, compliance costs, and enforcement difficulties.

INTRODUCTION

Is an income tax preferable to a consumption tax? Which fringe benefits should be included in the tax base? What capitalization rules should apply to exploration costs or research and development under an income tax? These and countless other questions have long been studied from the perspective of ideal tax policy, which is concerned about the equity (distributive effects) and efficiency of the tax system.

Recently, analysts have paid increasing attention to the rather significant details of implementation. Complex tax systems impose large compliance costs, which Slemrod (1995) suggests are on the order of $75 billion for the U.S. income tax.