MY VIEW: Maya MacGuineas April 15 2013
It's Tax Day, meaning that those who procrastinated spent their weekends trying to work through our overly-complex tax code. The federal code contains nearly four million words and the IRS's Taxpayer Advocate estimates that businesses and individuals spend nearly 6.1 billion hours a year completing their filings. The tax code's complexity is in part due to the many tax expenditures in the code that also lose a significant amount of revenue, estimated by the JCT at nearly $1.3 trillion for 2013.
Therefore, it isn't surprising that tax reform could be a key factor in a comprehensive debt deal. CRFB President Maya MacGuineas writes in The Hill that the strong bipartisan support for reforming our tax code could offer significant deficit savings while making the code more efficient and more progressive. MacGuineas writes:
While many assume that getting an agreement on additional revenue is impossible, reform that cleans up the tax code, makes it more efficient and enhances competitiveness — along with significant structural entitlement reforms — could provide the breakthrough we need for a plan that addresses long-term national debt while promoting economic growth. That is a lot of pressure for an undertaking that is both desperately needed and treacherously complicated.
There is support in both parties for reforming the more than $1 trillion a year in tax deductions, exemptions and other loopholes known as “tax expenditures,” which are essentially spending through the tax code.
Many of these tax expenditures are only enjoyed by select taxpayers and distort the economy by disproportionately benefiting some activities, companies or industries over others. We can both reduce tax rates and the deficit by eliminating, limiting or reforming these loopholes that adversely affect the budget and the economy.
Usually, getting Washington to agree on the problem is not the more difficult part, it's agreeing on the solutions. But on tax reform, there are many bold approaches that could gain the support of both parties. MacGuineas highlights two possible policy changes:
The Simpson-Bowles debt commission illustrated one way to deal with tax expenditures: Its plan outright eliminated most expenditures and reduced tax rates to much lower than they are today.
If lawmakers want to reinstate a tax break, they would have to pay for it by buying the rates back up. I love this approach and would hope lawmakers would have the fortitude to start with a clean slate and limit the number of tax breaks they layered back in. But the political pressure to protect and preserve every single tax break would be mind-boggling.
Another approach designed by myself, Marty Feldstein and Daniel Feenberg of the National Bureau of Economic Research, which would cap tax expenditure benefits at a set level of household income, might be more politically plausible. The advantage of this approach is that it eliminates the haggling over which tax expenditures to keep, which should make this reform easier to enact, given the political realities we face.
Whether lawmakers choose to go the route of the Fiscal Commission by eliminating all tax expenditures and adding provisions back in, institute a cap on tax expenditure benefits like the MacGuineas-Feldstein-Feedberg proposal, or pursue an alternative policy, something should be done to improve our tax code and help reduce the deficit. With both tax writing chairmen committed to taking a serious look at the code in 2013, tax reform could be one of the answers to our fiscal problems.
Click here to read the full op-ed.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the committee.