Tax Reform: The Wheels Are Beginning to Turn

My first column for the Christian Science Monitor (first appeared here):

America’s tax system is broken. It’s needlessly complex, economically harmful, and often unfair. It fails at its most basic task, raising enough money to pay government’s bills.

Because of Washington’s love affair with temporary tax cuts, it’s also increasingly unpredictable. Americans deserve a simpler, fairer, more pro-growth tax system.

It won’t be easy. Any reform creates losers as well as winners – and losers always let their representatives know how they feel. But Washington is giving hopeful signs that the journey toward tax reform – the first in a quarter century – may finally be under way.

In his State of the Union message, President Obama called on Congress to reform individual and corporate taxes. He reiterated the offer at a press conference Feb.15. Democrats and Republicans have been holding hearings and drafting legislation. The president’s fiscal commission and the Domenici-Rivlin debt-reduction task force (on which I served) have proposed serious reforms, taking hatchets to the trillion-dollar thicket of tax preferences that complicate the code and distort economic activity.

Fixing the corporate tax code looks to be the easier task. Federal and state levies average more than 39 percent, the second highest in the world; we’ll take the top spot in April when Japan slashes its rate. Add in rising concern about America’s international competitiveness and slow economic recovery, and you have a recipe for a bipartisan push to cut corporate tax rates.

Given America’s budget woes, however, we can’t afford to reduce future revenues. Unless Washington demonstrates remarkable spending discipline, we will need all our existing revenues, and more, to cover the costs of an aging population and rising health-care costs.

That’s where real reform comes in. Along with high corporate tax rates, we also have very generous tax breaks, leaving much corporate income untaxed or facing only low effective rates. Far better would be a system with fewer tax breaks and lower rates across the board.

Such reform would reduce distortions and allow economic fundamentals, not taxes, to guide business decisions. As Mr. Obama put it: “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate … without adding to our deficit.”

Congress should pursue the same strategy with an even bigger challenge, the personal income tax. Dozens of exemptions, exclusions, deductions, and credits complicate the code and make Swiss cheese of our tax base. These preferences mean that trillions of dollars of income go untaxed. As a result, Congress must impose higher rates on the income that does get taxed, weakening economic growth and treating unfairly tax-payers who don’t milk every preference.

Policymakers should cut those tax preferences, use some of the resulting revenue to cut tax rates, and use the remainder for deficit reduction. A good starting point would be the fiscal commission’s proposal to eliminate many tax preferences and use the savings to deep-six the hated alternative minimum tax, cut tax rates across the board, and boost revenues by $80 billion a year. That plan would also make taxes more progressive while retaining slimmed-down deductions for mortgage interest, retirement savings, and charitable giving.

Tax reform will be a journey. The landmark reform in 1986 capped several years of effort. The same is likely to be true this time. If our leaders want to enact the landmark tax reform of 2013, they need to start sharpening their hatchets now.

4 thoughts on “Tax Reform: The Wheels Are Beginning to Turn”

  1. I saw your piece in CNN Money about how failing to raise the debt ceiling and defaulting on the debt would be horrible. I think you are 100% wrong.

    Defaulting on the debt would be bad only for the politicians. It would be a boon for the taxpayers, as they would no longer be saddled with over $100K of government debt per household. A family of 4 living off $50K a year will not be hurt in any way by the government’s sudden inability to borrow money from China and the Fed to pay for billion dollar embassies in Baghdad.

    Congress have never failed to raise the debt ceiling. Why do we even have a debt ceiling? It exists in name only. Why the pretense of fiscal responsibility? Let’s give it a proper name: The debt rocketship. That’s what it is, after all.

    Did you notice that the Federal Reserve is now the #1 holder of Treasury bonds? That is more insane than the craziest nightmare I could conjure from the depths of H.P. Lovecraft’s universe. How much money will the Fed magically create before it stops? How bloated will the Fed’s balance sheet get? The Fed is not a lender of last resort so much as a lender of infinity.

    The only way out besides a defalt is to print money out of thin air. You clearly are a supporter of hyperinflation, since you consider default unthinkable. There are already food riots across North Africa and the Middle East. Perhaps you want food riots to appear in the US as well? In case you haven’t heard, inflation is quite a bit higher than what CPI claims. Convenient that it leaves out the commodities that the working class spend the most on: food and energy.

    Cotton hit an all-time high today. Should we have textile riots next? Do you want to see us borrow and spend so much that the dollar becomes worth less than the paper it’s printed on, and the poor can no longer afford to feed or clothe themselves, while Obama and Hillary continue to eat caviar with royalty?

    I, for one, would rather see the poor absolved from the debts incurred by their masters. I would rather see the working class dust themselves off and get back on their feet, while the political class gets tarred and feathered for their crimes, and abolished to GitMo.

    Printing our way out of this mess will hurt the lower class, but defaulting will primarily hurt the political class. How dare you call on the politically connected to protect their phantom reputations and maintain their caviar binges while you let the poor starve and freeze to death! Your mentality is the type that got this country into this mess, and if you had it your way, you would sacrifice every civilian in the country for the sake of your elitist cabal.

  2. Tax reform is essential to at least make the code fair, efficient, and less complicated to understand. Reform is not essential, however, to raise “enough money to pay government’s bills.” Profligate, unchecked spending is the main reason taxes are not adequate to the task and never will be as long as government is allowed to remain more self serving than serving the public good.

  3. We won’t get tax reform until the system crashes via default. Outright default is unlikely, while default through inflation seems a a dead certainty.

    For whoever survives the mass starvation that’s coming, your tax policy might be of interest.

Comments are closed.