Congress is long overdue for serious effort at tax reform
Sunday, March 14, 2010
Congress is ready for a nap. The financial crisis was a year-long emergency. Health-care reform has been a seemingly endless grind. No one quite knows what to do about jobs. Cap-and-trade seems doomed in the Senate, which means all the work the House did to pass its bill was for nothing. The election looms. There's not a lot of enthusiasm for taking on another big, complicated issue that will be distorted by interest groups and screamed about on cable networks and ripped apart on op-ed pages.
But there is some. A lot of it is coming out of Sen. Ron Wyden's office. Wyden (D-Ore.) -- last seen pushing a bipartisan, comprehensive health-care reform bill that would have passed in a landslide if pundits and experts had votes in the Senate -- is Congress's Energizer Bunny when it comes to proposing ambitious policy overhauls. His next target is tax reform.
As well it should be. There aren't many free lunches left in Washington. But from a policy, if not a political, standpoint, tax reform is one of them. Economists of all stripes agree that the tax code has become so complex and inefficient that we're raising less money than we could with a simpler tax code that offered lower rates. Think about that: We could cut taxes for most Americans while keeping revenue steady.
The problem, of course, is that not everyone agrees those breaks and loopholes and deductions and exemptions and deferrals and exclusions are bad. Save for a couple of big-ticket tax items -- the mortgage interest deduction, for example -- the politics for most of the sections you'd want to clean from the tax code pit a tiny group of beneficiaries who are committed to preserving their sweetheart deals against the vast majority of Americans who have no idea that the tax code contains that deal in the first place. "Every interest group around will be lined up saying if you take our tax break, Western civilization will end," Wyden predicts.
Luckily, he isn't alone on this one. Sen. Judd Gregg, the ranking Republican on the Budget Committee, has joined him. The bill they have crafted shows the ways that tax policy is, and isn't, an ideologically polarized issue. Republicans and Democrats get into a lot of fights about how high taxes should be and what they should fund. But Wyden and Gregg have largely sidestepped those fights by holding revenue more or less steady and are simply attempting to clean up the code. "We think there's very fertile ground for a bipartisan initiative, which takes the tax laws and makes them dramatically simpler and maintains their progressive nature," Gregg says.
The Wyden-Gregg plan takes the six income brackets currently on the books and compresses them into three (15 percent, 25 percent and 35 percent). It gets rid of the alternative minimum tax. It triples the standard deduction available to all taxpayers, which means that people don't need to spend as much time trying to itemize deductions and figuring out ways to game the system. It kills off the existing six corporate rates and eight corporate brackets, and replaces them with a flat corporate tax of 24 percent. And it reduces the task to a one-page form.
The result of all these changes? The average corporation and taxpayer would pay quite a bit less. But the system wouldn't be bringing in less money because fewer people would escape their burden altogether. That last bit is particularly important, says Bob McIntyre, director of Citizens for Tax Justice. "If you're getting rid of loopholes and lowering rates, you get winners and losers, not just losers. So all of a sudden it's not only one side that cares. That's especially true on the business side, which is where the real action is in tax reform and lobbying. That's the dynamic that makes tax reform possible."
And even if the project proves difficult, we're long overdue for tax reform. Most experts think you've got to scrub the code every 10 or 15 years, much like ship owners have to dock the boat every so often and shear the barnacles from the hull. For a while, we were doing just that: We had major tax reform in 1954, 1969, 1976, 1986, and then . . . nothing. We've gone 25 years without a serious effort at tax reform. That's 25 years that corporations and interest groups and constituencies have spent complicating the tax code. No wonder 60 percent of us have someone else prepare our taxes, and 20 percent or more use computer software.
Reforming the system has been made more difficult by another trend: We've begun running more of our social policy through the tax code. Rather than creating programs, we create tax credits. "It's easier politically," says Roberton Williams, a senior fellow at the Tax Policy Center, "because it's easier for a congressman to say that I cut your taxes rather than that I started a new program to spend your money."
The irony is that writing policy this way actually results in more spending because the funding grows automatically. A program needs Congress to vote to give it more funding. A tax deduction simply requires more people who qualify to take advantage of it, or more accountants who figure out how to make it look like their clients qualify for it.
Which is just one more reason to take a good, long look at the tax code. Since Congress doesn't need to reevaluate each bit of it every year, a lot of breaks and credits and deductions survive long past their sell-by date. Congress might be tired, but on this issue, it's been slumbering for too long.
"This is the first major total tax reform effort put forward by bipartisan senators in 25 years," Gregg says.
It's about time.