How Big of a Joke is Our Tax System?

Anyone with a cursory knowledge of our current tax code can tell you that it is broken. According to the Committee for a Responsible Federal Budget [2] (CRFB), which posted an interesting piece [3] this morning on the need for comprehensive tax reform, our tax system "is inefficient, distorts behavior, stifles economic growth, and raises insufficient revenue to fund current or projected levels of government spending." CRFB included several suggestions for the President's Economic Recovery Advisory Board (PERAB), which was due to release a set of publicly generated recommendations on reforming the tax code today, but postponed the release until after the holidays.

Most expect Congress to take up a comprehensive tax reform package next year, and Democrats will likely be working from a set of proposals that include those provided by PERAB. The White House blog declares [4] that the proposals will include "a spectrum of reform ideas relating to tax simplification, enforcement of existing tax laws and reform [of] the corporate tax system," and emphasizes that none of the proposals "would raise taxes on families making less than $250,000."

CRFB believes that the White House left out several important aspects of tax reform:

• Make rational and deliberate decisions on the Bush Tax Cuts – CRFB notes that without congressional action, all of the Bush Tax Cuts will expire at the end of next year. CRFB contends that letting all these cuts expire would be politically impossible, but that it would cost $2.3 trillion over the next decade to renew them. They go on to recommend that lawmakers "must think carefully" about which cuts they chose to renew and suggest that Congress not simply renew those cuts "for everyone under a certain income threshold."

The recommendation is a bit boilerplate, but I agree that legislators should scrutinize all of the Bush Tax Cuts and avoid setting an income threshold for renewal. The controversy, of course, will come over which cuts Congress should renew and which they should leave to expire. Unfortunately, the president hemmed himself in with all that campaign talk about not raising taxes on those making over $250,000 annually; the ceiling should have been half that.

• A permanent AMT fix – Rather than continuing to pass a patch each year, Congress, according to CRFB, should enact a permanent AMT fix. They suggest indexing the threshold to some measure of inflation. This measure, they say, may cost up to $450 billion over 10 years, and, like the extension of any Bush Tax Cuts, Congress should offset.

This suggestion is also fairly commonsensical, though if Congress chooses to offset the fix, controversy will come in what offsets lawmakers choose.

• Broaden the tax base – CRFB argues that waste in the current tax system, which "allows upwards of $1 trillion a year in deductions, exclusions, credits, and other tax loopholes," leads "to both higher than necessary tax rates, and larger than necessary deficits." They also claim that tax expenditures are regressive and far less transparent than equivalent spending programs. Therefore, CRFB recommends that legislators "take a careful look at all current tax expenditures."

I couldn't agree more. I would go even further and recommend that Congress enact legislation requiring lawmakers to examine tax expenditures side-by-side with spending programs during the budgeting process so that legislators and the public can gain a better understanding and then assess the value of taxpayer giveaways to the corporate world.

• Consider the viability of new forms of taxation – Because "limitations of the current tax system," CRFB suggests lawmakers consider proposals like a tax on financial transactions (FTT) and energy. They also recommend looking at a somewhat more radical move towards a progressive consumption tax or value-added tax in place of our current system.

While I believe an FTT would be a wonderful idea for a new tax, any move toward a consumption tax or value-added tax would have to be of a very progressive nature.

Image by Flickr user styro [5] used under a Creative Commons license.