The state of our tax system

UPDATE: Ms. Altshuler joined White House veteran Bruce Bartlett and economic advisor Rich Lowrie in a lively and important conversation about tax reform at the National Constitution Center on Tuesday, February 7th at 6:30 p.m. Listen to the podcast:

:

Photo by DonkeyHotey

Yesterday I testified before the Senate Finance Committee at a hearing titled “Extenders and Tax Reform: Seeking Long-Term Solutions.” I was depressed about the state of our tax system before I started preparing. Then I started prepping and became distraught.

Our tax system is a mess and unless we send a clear signal to Congress to do something about it, it’s just going to get messier and messier. As Bruce Bartlett writes in his book, The Benefit and The Burden, the tax system is like a garden. It gets overgrown and chaotic unless you regularly clean it. Well, we’ve got an eyesore now and need to bring in a bulldozer.

Here’s some background that will help explain why I am distraught:

A total of 60 temporary tax provisions expired at the end of 2011. Each was originally enacted with an expiration date. Almost every one of those dates was subsequently extended. In most cases, these “temporary provisions” have been extended over and over again for just a couple of short years or less.

The vast majority of extenders were originally enacted to provide special treatment to some activity or investment. They vary widely from special depreciation rules for NASCAR race tracks to subsidies for commuting. Unlike other tax provisions that provide targeted tax benefits, however, extenders have a limited shelf life. Much like the items in the dairy section of the grocery store, our tax code is now littered with expiration dates.

For many taxpayers who are impacted by one of these extenders the frequent ritual of being on tax code death watch only to be saved by last-minute clemency creates tremendous volatility and uncertainty. It creates a perception that our tax code is unfair and reinforces the view that the current legislative process is dysfunctional and our elected representatives are unwilling or unable to choose among competing priorities.

It’s time to take a stand on extenders and on tax reform. I recommended at the hearing that the extenders be considered within the context of fundamental tax reform.

We seem to have forgotten that the fundamental purpose of our tax system is to raise revenues to fund government. The current system is riddled with tax provisions favoring one activity over another or providing targeted tax benefits to a limited number of taxpayers. Whether permanent or temporary, these provisions create complexity, generate enormous compliance costs, breed perceptions of unfairness, create opportunities for manipulation of rules to avoid tax, and lead to an inefficient use of our economic resources. The tax code has become more and more difficult for taxpayers to understand, less stable, and increasingly unpredictable.

A reform that broadens the base would not only raise revenue but would simplify the system, increase transparency, make it less distortive by reducing tax-induced biases towards certain activity, and improve the fairness of the system. Broadening the base involves deciding which special tax provisions to keep in the code and how best to design them.

Our current fiscal situation requires that we refrain from our habit of kicking the can down the road on tax reform and face the challenges ahead. It’s time to bring in that bulldozer.

Rosanne Altshuler is a professor in the economics department at Rutgers University. She served as senior economist to the President’s Advisory Panel of Federal Tax Reform (2005) and acting special advisor to the Joint Committee on Taxation (2004).

Comments

comments

Trackbacks