On tax reform, a lot of dodging of hard decisions
UPDATE: Bruce Bartlett participated in a tax-reform program at the National Constitution Center, with economics professor Rosanne Altshuler and Rich Lowrie, co-author of the 9-9-9 plan. Listen to the podcast:
The tax code is like a garden. Without regular attention, it grows weeds that will soon overwhelm the plants and flowers. Unfortunately, no serious weeding has been done to the tax code since 1986. There is a desperate need to pull the weeds, cut away the brush, and rethink some of the plantings to restore order, beauty, and functionality.
At its core, the purpose of any tax system is to raise the revenue needed to pay the government’s bills. Ideally, one would like to start with a clear philosophy of what government should do and how much it should spend, and only then decide how to raise the revenue to pay for it.
The problem we have today is that there has been a serious divergence between the size of government that people want and what they are willing to pay for. The idea that deficits are an irresponsible passing on of debt to future generations is no longer sufficient to support a tax system capable of raising adequate revenue to finance current spending. Nor is there the political will to cut spending to the level people are willing to pay. At the same time, no one believes this trend is sustainable.
I believe that federal revenue will need to rise as a share of GDP to pay for the cost of an aging society and stabilize the nation’s finances. It is unrealistic to try to accomplish that solely by cutting spending. Should the need for higher revenue be accepted by Congress, it would be better to raise that additional revenue by taxing consumption rather than raising tax rates. But the wealthy will also have to increase their contribution. If they don’t, the rest of us will have to pay more.
A debate about tax reform may help clarify the role of government in the 21 century. The public misunderstands basic facts about the tax system. Polls show that people consistently believe the federal tax burden to be significantly higher than it actually is and few know that close to half of all tax filers either pay no federal income taxes at all or get a refund; that is, they have a negative tax rate.
What is so far lacking in the tax-reform effort is a compelling reason to enact any actual reforms, as opposed to cutting taxes again or just extending the Bush tax cuts for another year or two. Unfortunately, political tactics are also a barrier to a deal. With 2012 being a presidential election year, both parties would like to be on the winning side of the tax issue. But what is the winning side?
In principle, people favor tax reform–as long as it doesn’t take away their favorite deduction or credit or raise their taxes in any way. In principle, everyone favors tax simplification, base-broadening, and lower rates. And in principle, everyone favors reducing the deficit. Most people even support increasing taxes–as long as it’s not on them. Action before the election is unlikely because both parties will want to campaign on tax reform, hoping that the election results will strengthen their hand.
That means 2012 will likely be a year like 1984, when tax reform was a topic of discussion and important progress was made in narrowing the issues and finding common ground. But legislative action probably won’t happen until 2013 or 2014. It took two full years for final congressional action on the Tax Reform Act of 1986 after the Treasury had already done a thorough analysis and put forward a detailed proposal.
Citizens can help move the process forward by becoming educated about the tax system and forcing elected officials to go beyond opposition to all tax increases and support for all tax cuts. Tax reform involves trade-offs. Those who aren’t willing to commit to any trade-off, except in a vague, general way, don’t deserve to be taken seriously.
Bruce Bartlett is the author of The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take (Simon & Schuster). This post first appeared in the Feb. 5 edition of the Philadelphia Inquirer.