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Thursday, April 11, 2013

More thoughts on tax reform

Will tax reform happen?  It would seem so given that both parties and leaders in Congress and President Obama talk about it.  A 4/10/13 article in the Christian Science Monitor - "Tax reform: Why a kinder, simpler tax code eludes Congress, so far," by David Grant, notes some obstacles. These include:
  • Are people really that concerned with complexity?  Perhaps not if it means cut back or elimination of some deduction or credit the use.
  • Bruce Bartlett is quoted - "It's very difficult to lower rates in a revenue-neutral matter without raising taxes on people with relatively modest incomes," given the current tax code, Mr. Bartlett says. "It's not politically doable."
  • The difficult discussion of what will be eliminated to allow for lower rates hasn't occurred yet.
I was interviewed for the story. Mr. Grant told me he was reading Showdown at Gucci Gulch - a book about some of the behind the scenes activities that led to the Tax Reform Act of 1986.  It is a great book. If you haven't read it, I highly recommend it.  Many things have changed since then though. For example, leading up to TRA'86, the top individual rate was 50% and the top corporate rate was 46%.  So if we think rates are high today, they are lower than in 1986! Also, there were some behind the scenes discussions on changes and there were special provisions for certain companies only identifiable if you could figure out who, for example, was engaged in a certain construction project. We won't see any of this today.  And Twitter and blogs will keep people quite informed of what is being discussed.

A recent Rasmussen Report (4/11/13) indicates that 63% of voters do not think taxes should be increased. But, 28% think taxes need to be increased to address the deficit. The issue of whether tax reform includes tax increases depends on a few things including how that is defined.  Revenue neutral reform means overall - in the aggregate.  Some taxpayers will see their taxes go up and others will see them go down. 

What do you think? Will tax reform occur by the end of 2014 (the end of the 113th Congress)?  What obstacles exist?


Unknown said...
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Unknown said...

Tax reform is difficult because it is always hard to meet all the good tax policy principles at the same time.
First of all, we have to look for the equity in the tax system. Is the progressive tax rate fair enough? Are some tax breaks causing inequity between rich and poor? (e.g. capital gain, mortgage interest, charitable distribution, etc.). Because different taxpayers have their own financial situations, it’s always hard to meet all of them.
Furthermore, the simplicity has to be meet at the same time; a simpler tax code would reduce the administrative cost and increase the compliance. But sometimes simplicity can’t be totally compatible with other principles. For example, a flat rate is very simple but it fails to meet the principle of equity. The poor would think it’s not fair for them to pay the same tax as the rich. But if we apply more deductions and credits in order to increase the fairness, then we will make the tax code more complex again.
In addition, the tax laws have to be neutral. People’s behaviors shouldn’t be altered too much by the tax system. It would be a mess if people start to move to look for a tax heaven, or even get married for tax-motivated reasons.
Finally, we need to make sure that more revenue is raised for the government. To simply increase the rate would definitely raise the revenue easily, but it might also change people’s behaviors or create unfairness. A broader base is always a good way to raise the revenue with not too much rate increasing. But more people will be paying new taxes, which they are definitely not willing to do.
So all the principles have to be achieve at the same time during the tax reform. It will need a lot of time and effort indeed. I think the most important thing is to make sure that the taxpayers and government agree on what they want from each other and how much they should pay for the services or revenue they want.

Krissy R. said...

There is no perfect answer when it comes to major tax reform, and I would be surprised to see a major overhaul of the tax system happen by the end of 2014.

The primary proposals of changing from an income tax to another type of tax such as a retail sales tax or a consumption tax have several notable pros and cons. No proposal is 100% supported. After listening to Laurence Kotlikoff ( discuss the benefits relating to the Fair Tax, I was convinced that the tax made a tremendous amount of sense. However, I subsequently listened to Bruce Bartlett ( explain his opposition to the Fair Tax and was persuaded otherwise. My point is that there are many different perspectives on each system with strong reasonable arguments that we cannot fully understand the true impact from every perspective of the various tax systems.

Regardless of what tax system we are under, it is understood that special provisions will be needed for a plethora of reasons such as mitigating the transitional effects of changing from one tax system to another, providing for equity/fairness, and adjusting for the unintended consequences of the general rules. The transitional issues alone would make a major overhaul of the tax system extremely difficult to execute and fund.

Some argue that we should keep the current income tax system but remove much of the complexity inherent in the tax code. Any tax expenditure has a number of proponents backing it, and would be difficult to eliminate. These tax expenditures are what reduces government revenues and make the tax code increasingly complex. However, the reason that the tax code became complex to begin with is to provide more equity, allow for temporary provisions and flexibility, and to meet various economic goals - to name just a few reasonable explanations.

When a group of just 4-5 people want to do something as simple as get together for dinner and can’t all agree on a single restaurant to eat at without one or more of them feeling like they are not getting what they truly wanted – what makes us think that over 300 million Americans could possibly agree on a single tax system?