Tax Reform Isn't a Unicorn
How hard can it be to get both sides to applaud?
President Barack Obama and the new Republican majorities in Congress have spent the past few weeks posturing on tax policy rather than advancing serious proposals. This ought to change -- and it can. The U.S. badly needs tax reform, and there's surprising scope for cooperation.
The requirements for action really aren't that demanding. The two sides will have to spend a little of the time between now and the end of 2016 governing rather than campaigning. And they'll need to recognize that, in governing, half a victory (sometimes called compromise) is better than nothing.
Yes, that may be asking a lot -- but then tax policy is unusually promising for these purposes. The current tax system is so bad, it's easy to design partial victories for each side that, taken together, would be a huge win for the U.S. taxpayer.
The basic ingredients are these: Simplify the code by broadening the tax base through closing or reducing exemptions and deductions. At the same time, cut marginal rates while making the system more progressive. In the aggregate, make the reform revenue-neutral or even modestly revenue-reducing, thereby short-circuiting the poisonous debate about the proper scale of government.
A new tax code along these lines would be fairer, more efficient and pro-growth. Fine in theory, you might say -- but this is Washington. Well, as it turns out, the last comprehensive U.S. tax reform, enacted in 1986, combined simplicity, fairness and efficiency. Moreover, that plan emerged in a burst of clarity after months of futile bickering had buried an initially smart proposal under layers of complexity. In the end, out of sheer exhaustion, agreement was reached on a grand simplification.
Unfortunately, almost 30 years of regular meddling has brought the reformed code to its present state of dysfunction. A few years ago, one of those worthy bipartisan commissions that Washington likes to convene proposed some fiscal reforms. It got nowhere, but it proved that coming up with a sensible plan isn't the hard part. The challenge is finding the political will.
Obama's new tax proposals, announced in his State of the Union address, offer a glimmer of hope. They're a mixture of good, bad and indifferent, presented in a lamentably divisive way. But some of the ideas are getting more criticism than they'd deserve if they were part of a larger, more comprehensive proposal.
There's his plan to end the favorable tax treatment of college savings plans, for example. Or his proposal to abolish the so-called "angel of death loophole," which allows taxpayers to pass on capital gains to their heirs free of income tax. Both these ideas would be excellent elements of an overall effort to broaden the tax base. Introduced piecemeal, they look suspiciously like -- indeed are -- tax increases. Appealing as that may be to some of the president's supporters, it means they are pretty much dead before arrival in the Republican Congress.
A broader income-tax base with lower rates is something the administration can sell to Republicans, especially if aggregate revenue is proposed to be (at most) no higher than it is today. And Democrats can console themselves with the knowledge that base-broadening is inherently progressive -- because the rich, and only the rich, can afford the expertise that turns every exotic exclusion from the tax base into tax-sheltered income.
Meanwhile, a simpler system with lower rates has a feature that members of both parties (and neither) can get behind: It would be good for economic growth.
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