As lawmakers in Washington continue to grapple with competing demands for targeted tax carveouts, new savings incentives, and specialized credits, a newly released publication from the Tax Foundation offers a comprehensive look at how the federal government could fundamentally streamline the nation’s tax code.
The organization’s new book, Options for Reforming America’s Tax Code 3.0, models the economic, distributional, and revenue effects of 86 distinct modifications to federal tax laws. While the compendium includes proposals that would add complexity, a significant portion of the book focuses on realizing one of the Tax Foundation’s core principles of sound tax policy: simplicity. Under this principle, tax codes should be transparent, easy for citizens to comply with, and straightforward for administrative agencies to enforce.
Over the decades, the federal tax code has grown increasingly intricate. Proposals for specialized savings vehicles, targeted tax increases, and intricate policy carveouts continually threaten to deepen the compliance burden for both individuals and corporations. However, the reforms detailed in the Tax Foundation’s latest guide demonstrate that lawmakers possess viable pathways toward a leaner, more transparent tax system.
Eliminating the Individual and Corporate Alternative Minimum Taxes
Among the most prominent simplification proposals in the guide are options to eliminate the individual Alternative Minimum Tax (Option 38) and repeal the corporate Alternative Minimum Tax (Option 74). Alternative minimum taxes operate as a parallel track alongside the regular income tax code, establishing an effective floor on the tax liability a person or business must pay. To determine compliance under an AMT, taxpayers are frequently forced to calculate their tax liability twice—once under standard income tax rules and a second time under the distinct parameters of the AMT.
The individual and corporate alternative minimum taxes originated from similar political backdrops during the 1960s, the 1980s, and more recently the 2020s. In each era, lawmakers and voters expressed frustration when average tax rates for certain high-income earners and large corporations dipped below top marginal rates.
Yet, public policy experts note that low average tax rates do not inherently signify a flaw in the system. For instance, sound and pro-growth reforms—such as full expensing for capital assets—frequently generate low effective tax rates for businesses in the short term that largely balance out over the long run. These pro-growth provisions are designed to incentivize investment, meaning that low effective tax rates are often a temporary and beneficial feature rather than an administrative bug.
Despite this, when targeted tax preferences, deductions, and credits enacted by Congress result in low average tax rates that trigger political backlash, lawmakers have historically resorted to creating alternative minimum taxes rather than confronting those preferences directly.
The individual AMT has remained active since 1969, though subsequent legislation—most notably the Tax Cuts and Jobs Act (TCJA) and the One Big Beautiful Bill Act—has successfully narrowed its scope. Projections from the Congressional Budget Office indicate that fewer than 600,000 taxpayers will pay the individual AMT, representing roughly 0.3 percent of all tax returns. Nevertheless, for those caught within its reach, the administrative burden remains exceptionally high. The National Taxpayer Advocate once observed that the AMT nearly doubles the paperwork burden associated with filing a federal income tax return.
Meanwhile, Congress established a corporate AMT in 1986, subsequently repealed it beginning in 2018 under the TCJA, and then reinstated a corporate AMT under a completely new set of rules via the 2022 Inflation Reduction Act. Survey data from organizations like the Tax Executives Institute indicates that the modern corporate AMT has introduced substantial compliance challenges for U.S. companies while yielding relatively modest amounts of new federal revenue.
By eliminating both the individual and corporate alternative minimum taxes, policymakers could do away with the complex, parallel reporting systems they necessitate. For legislators concerned about potential revenue losses resulting from these eliminations, the fiscal gap could be addressed by directly reforming the underlying deductions and credits that generate low average tax rates in the first place.
Streamlining Savings Incentives Through Universal Accounts
The federal tax code currently houses a sprawling assortment of tax-neutral savings vehicles, each governed by its own set of distinct rules. While millions of Americans are familiar with traditional retirement options like 401(k) plans and individual retirement accounts, the broader landscape of specialized savings accounts is vast. Over recent years, federal lawmakers from both political parties have proposed even more tax-advantaged accounts tailored for specific milestones, such as first-time home purchases, lifelong skill-building, and disaster mitigation and recovery expenses.
Maintaining multiple, specialized savings vehicles dramatically increases the paperwork, tracking, and account maintenance required of ordinary taxpayers. Furthermore, it elevates administrative overhead for the Internal Revenue Service and the Treasury Department while violating the core tax principle of neutrality by favoring certain types of savings over others.
To address this fragmentation, the Tax Foundation’s reform guide outlines the creation of Roth-style universal savings accounts. Under this approach, individuals would be permitted to make annual post-tax contributions to a universal savings account, with the contribution ceiling indexed to inflation in subsequent years. Unused contribution room could be conveniently carried forward into future years, and earnings on these contributions would grow completely tax-free. Additionally, individuals could withdraw funds at any time for any reason without incurring penalties or additional taxes, with the withdrawn amounts safely added back to their available contribution room.
To achieve meaningful long-term simplification, Congress could eventually phase out legacy savings vehicles such as health savings accounts, flexible spending accounts, and 529 plans, though policymakers would need to manage the transition carefully.
Reforming the Earned Income Tax Credit and Child Tax Credit
The structure of family- and work-focused tax credits represents another major area ripe for administrative consolidation. Under current law, parents can claim a child tax credit of up to $2,200 per child, which begins to phase out for single filers earning more than $200,000 annually and joint filers earning above $400,000. Concurrently, low-income parents and low-income childless workers may claim the Earned Income Tax Credit, the rules for which vary significantly depending on filing status and the number of qualifying children.
While the original purpose of the EITC was to reward work—a function it continues to perform—it also operates effectively as a secondary child credit. However, the maximum credit for a childless worker remains modest compared to the substantial assistance provided to taxpayers with qualifying dependents.
The divergence between the phase-in and phaseout rules of the EITC and the child tax credit creates substantial complexity for taxpayers and administrative burdens for the IRS. Compounding this confusion are conflicting age thresholds: children are eligible under the EITC through age 18, or age 23 for full-time students, but only through age 16 under the child tax credit.
To resolve these discrepancies, the Tax Foundation’s guide proposes reforming both credits so that one functions strictly as a work incentive while the other operates exclusively as a child support mechanism.
Enacting Full Expensing for All Capital Investment
In an ideal cash-flow tax system, businesses would be permitted to immediately deduct all necessary operational expenses from their gross revenues. However, the contemporary U.S. tax code deviates significantly from this model. While certain everyday expenses, such as wages, machinery, and equipment, are frequently deductible in the year of purchase, buildings and other long-term physical structures must be depreciated across many years according to rigid schedules.
These complex depreciation and amortization rules require extensive tax planning for businesses and burdensome oversight for the IRS. Moreover, by delaying write-offs, depreciation rules raise the after-tax cost of investing in essential physical assets, discouraging capital investment that would otherwise drive economic growth.
Allowing full and immediate deductions for all capital assets, including commercial structures, would eliminate the need to track intricate depreciation schedules. Under such a reform, every qualified business expense would yield an immediate, straightforward deduction, boosting long-term worker productivity, wages, and job creation across the economy.
Integrating Corporate and Individual Tax Systems
The structural division between different types of business entities creates another layer of systemic complexity. While many of the nation’s largest enterprises operate as C corporations, the vast majority of U.S. businesses are organized as pass-through entities, including sole proprietorships, partnerships, S corporations, and limited liability companies.
Profits generated by pass-through businesses are not taxed at the entity level; instead, earnings pass directly to the individual owners, who pay taxes on their personal income returns. In contrast, C corporations face double taxation: profits are taxed first at the corporate level via the federal corporate income tax, and a second time when shareholders pay individual capital gains or dividend taxes on distributions.
Maintaining two distinct business tax systems forces businesses to navigate entirely separate sets of rules and tax rates, frequently distorting economic decision-making by driving companies to choose their legal structure based primarily on tax avoidance rather than operational efficiency.
To mitigate this distortion, the Tax Foundation’s guide highlights the option of integrating corporate and individual tax systems by allowing C corporations to deduct the dividends they pay to their shareholders. Such a change would ensure that both C corporations and pass-through entities face a single layer of taxation, reducing distortions within the tax code and moving the federal government closer to a unified system of business taxation.
