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Sunday, April 5, 2009

It's Time for Major Tax Reform

Forbes: Time for a Tax Reform, by Bruce Bartlett:

Two recent announcements from the Obama administration have started the ball rolling on tax reform. This is a long overdue and welcome development.

It's critically important that Congress enact some sort of major tax reform every 10 years or so because the tax code becomes unbelievably cluttered very quickly with special tax provisions. It's essential to clear away this underbrush from time to time and look at the tax system in its totality.

Unfortunately, the last major tax reform effort took place in 1986. This means that a tremendous amount of work will be needed to achieve meaningful and efficient change, requiring boldness and bipartisanship. ...
Bush made a token effort at cleaning up the mess he created by appointing a tax reform commission in 2005. It issued an excellent report on Nov. 1 of that year--in plenty of time to include some of its recommendation in the FY 2007 budget. But instead, Bush simply ignored it.

However, the Bush tax reform effort may get a new lease on life. On March 28, the White House announced that a member of his tax commission, Prof. Elizabeth Garrett of USC, will become assistant secretary of the Treasury for tax policy. ...

During testimony before the Senate Finance Committee in 2006, Garrett reiterated her support for a VAT as part of a tax reform effort. She suggested using it to eliminate the payroll tax and fund Social Security and Medicare, an idea some Republicans, such as Newt Gingrich, have also toyed with.

Echoing the tax reformers of the 1970s, Garrett said tax expenditures must be eliminated in order to simplify the tax code. She also favors replacing tax deductions with tax credits to improve progressivity. That is because the tax saving of deductions depends on one's tax bracket, which benefits the wealthy because they are in higher brackets, while tax credits benefit all taxpayers equally.

Of course, the assistant secretary for tax policy doesn't make tax policy by herself, but it is the most critical position in government for implementing tax reform. It is a hopeful sign that Barack Obama has appointed someone with a record of favoring fundamental reform to this position.

Obama also signaled his interest in tax reform by asking Paul Volcker, who chairs his Economic Recovery Advisory Board, to appoint a tax reform task force that would report to him no later than Dec. 4....  

The task force has been asked to come up with ideas for tax simplification, closing tax loopholes, reducing corporate welfare and improving compliance. Its only constraints are that taxes cannot be increased before 2011 and no family making less than $250,000 will pay more.

Urban Institute economist Rosanne Altshuler, who was chief economist for the Bush tax reform commission, thinks Obama may have tied the hands of the task force too much by prohibiting any tax increase for those making under $250,000. Says Altshuler, "That means 95% of taxpayers can't pay additional tax, even if it would result in a more efficient system, decrease inequalities or make their lives much simpler. At a time of monster deficits, that pretty much rules out any sensible reforms." ...

Going forward, the Obama administration has little choice except to make tax reform a major initiative. According to the Joint Committee on Taxation, it has proposed more than $3 trillion in tax cuts over the next 10 years, including the extension of many Bush era tax credits of dubious value. Unless something is done to clean up the mess, the tax code will become completely incomprehensible even to tax lawyers and accountants.

The Obama administration also needs to think about raising revenue at some point. Although massive budget deficits are justified today by economic circumstances, they will become a drag on growth once the crisis is past. Some economists are already warning about renewed inflation and high interest rates not too far down the road, which will create political pressure for deficit reduction that will necessarily involve tax increases on those making less than $250,000.

Obama has a very ambitious domestic agenda. So far, he has been able to avoid explaining how to pay for it by the temporary need for large deficits. But eventually his spending will have to be paid for. Raising rates more than Obama has already proposed will only magnify all of the existing deficiencies of the tax code.

In the long run, the success or failure of his domestic agenda may depend on reforming the tax system in order to raise additional revenue at the least possible cost to the economy.

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Comments

It's important for congress to have major tax reform every so often: it makes shaking down the usual special interests so much easier.

Posted by: Bill Jones | Apr 5, 2009 5:30:58 PM

Hmmmm. The simple way to reform the IRC is to do away with all the later enacted junky tax credits and phase-outs that undermine the wisdom of the 1986 TRA.

Posted by: Anonymous | Apr 5, 2009 8:01:12 PM

Why do I have an urge to suddenly hold on to my wallet?

Posted by: DocinPA | Apr 6, 2009 8:30:44 AM

Tax reform is splashing in pool while the problems' in the pumphpouse. Everybody borrows the principal of liquidity from the pumphouse for play in the economic pool but everybody owes both the principal (which is in the pool) and the interest (which is not) thereby causing failure of some borrowers to repay P+I when all only got P.
No amount of splashing funds through tax reform is going to affect the imbalance caused by the pumphouse.
See my banking systems engineering analysis at http://youtube.com/kingofthepaupers with an index of articles at http://johnturmel.com/kotp.htm

Posted by: KingofthePaupers | Apr 6, 2009 1:41:06 PM

Well, considering everything this country as been through and done since Regan, I'll believe it when I see it.

Posted by: maggie | Apr 6, 2009 2:56:31 PM