Tax Analysts Blog

Tax Reform 2.0

Posted on Nov 9, 2012

All the public hears -- and all the politicians want it to hear -- is the siren song of lower rates and implausibly easy deficit reduction through "closing loopholes." And many commentators like to remark that there is bipartisan consensus for tax reform -- especially corporate tax reform -- implying that it may be something that could be accomplished in a town where gridlock has become the norm. Nothing could be further from the truth.

The words "tax reform" have different meanings to different people. The imprecision in the meaning glosses over what is probably the biggest sticking point between the two parties: whether there should be tax increases. For Democrats, tax reform without tax increases is not worth considering, while for most Republicans, tax reform that increases taxes is off the table. So when both sides are "agreeing" on tax reform, there really is no agreement at all. But those forces devoted to the worthy cause of deficit reduction have wrapped their proposals for tax increases in the cloak of tax reform to keep the prospects of a grand bargain alive -- in particular, to keep anti-tax conservatives in the House at the bargaining table.

The proposed tax reforms now getting attention are empty shells. Tax reform is certainly worth doing. But we need a reality check. Tax reform in our fiscally troubled world will be much more difficult than in 1986. We need to relaunch the process with more realistic expectations. We need to move away from these empty shells and start anew. We can call this renewed effort "Tax Reform 2.0." Allow me here to suggest some principles for Tax Reform 2.0.

First, we need to separate the process of tax reform from that of deficit reduction. Tax reform is a tough enough fight even when it's revenue neutral. We do not need an uphill battle. And we need to move the debate away from partisan politics and begin working through the inevitable special-interest politics.

Second, we need to expand our search for base-broadening revenue raisers beyond the official list of tax expenditures. As my former colleague at Treasury, Tom Neubig, likes to point out, a significant portion of the base broadening for TRA 1986 did not come from the tax expenditure budget. How do we find these hidden treasures? With the open endorsement of the taxwriting committee chairs, set the staff of the JCT to work. With a public commitment from the White House, get the Treasury staff working as they did in 1984.

Third -- and perhaps I am the one being naïve here -- we need to constantly place simplification at the forefront. Get rid of the AMT. Simplify rules for pensions and retirement saving. Simplify education incentives. And in our effort to maintain distributional neutrality, don't reinstate the Pease provision and personal exemption phaseout (as proposed by Obama). And don't install new phaseouts of itemized deductions (as suggested by Romney). These are just hidden marginal rate increases.

Fourth, and most importantly, we must manage the expectations of the public and of lawmakers themselves about the possibilities for rate reduction. We may never get to rates below 30 percent. We need to get to the mind-set where every percentage point reduction in the individual and corporate rate is appreciated for the major accomplishment that it is.

Read Comments (2)

AMT buffNov 9, 2012

"simplification at the forefront"?

Have you seen the flood of academic articles on low-salience taxation,
otherwise know as stealth taxes? Now even academics are willing to sacrifice
honesty in taxation for revenue. It used to be that only Congress felt entitled
to cheat on taxes by creating phase-outs, alternative taxes, and other sneaky
tax laws.

Congress will never enact a tax law which reveals its true marginal rates to
the public. Hidden rate kickers are here to stay.

The next frontier in of sneak taxes is taxation of non-income. This technique
was pioneered in a small way in the 1986 Tax Reform: Investors in mutual funds
were required to pay taxes on money they never received because the mutual fund
spent it on expenses.

We'll see all kinds of imputed income, perhaps eventually including a non-cash
income attributable to personal oxygen consumption or carbon emission. The sky
is literally the limit.

tax resolutionNov 11, 2012

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