Reform the Tax Code

Deficit reduction proposals from both Democrats and Republicans have been disappointing, and predictably so. In terms of the ratio between spending cuts and revenue increases, Democrats came up with a plan farther to the right than either Bowles-Simpson or Gang of Six plans, both of which were bipartisan plans. The Democrats, in their attempts at compromise with Republicans, have again merely compromised their own beliefs to craft a proposal that Republicans will not go along with anyway. And lo and behold, Republicans summarily rejected the plan, claiming it was a “non-starter” for many reasons – not least of which being that all of the Republicans on the committee have signed Governor Norquist’s pledge for no new taxes. Their proposal relies heavily on spending cuts, with only minor revenue increases that skirt the edges of any real tax reform.
Indeed, the number one thing missing from both of these proposals is comprehensive tax reform. The Bowles-Simpson plan released in December 2010 outlined bold moves to broaden the tax base, eliminate many tax expenditures, and lower overall corporate and individual rates, all while increasing revenues by $785 billion by 2020. This is no small number in itself, and the benefits of tax reform go beyond just deficit reduction.
The current tax code is riddled with tax expenditures, exemptions, and loopholes, forcing individuals and companies to spend heavily just to file their taxes. With tax accountants and lawyers in abundance, some companies have found ways to evade taxes altogether. The example of GE, which pays no corporate taxes, is one of many. This has led to unevenness and uncertainty among individuals and businesses, and it reduces our competitiveness in the world market. One-shot solutions like the Republicans propose will do little to decrease this uncertainty and create a more clear tax code for Americans to follow. The Democrats’ plan, in its reliance on tax increases for the rich, will likely make America less competitive, not more. While broadening the tax base and eliminating many corporate and individual exemptions would increase the burden on the rich in a similar way as the tax rate increases Democrats propose, the elimination of administrative costs and uncertainty – and the overall decrease in statutory tax rates – provided by the Bowles-Simpson plan are far more favorable.
There has been some talk between Boehner and Obama, among others, about some of these tax reforms, but Republicans are limited if they insist on considering tax reform as “new taxes.” Economists across the political spectrum, from Larry Summers to Greg Mankiw to Jeff Miron, agree that broadening the tax base is a good idea – I asked them while conducting interviews for a forthcoming article about Obama’s jobs proposal. Republicans and Democrats must put pandering aside and get serious about real reform.