Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of "The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take."
This week millions of Americans will be rushing to calculate and file their income taxes — and probably cursing whoever invented this confusing, complicated monstrosity.
Today's Economist
Perspectives from expert contributors.
Many people will spend money on accountants, tax software or storefront tax-preparation services. The cost in terms of time alone runs to the tens of billions of dollars, with billions more spent out of pocket. The aggravation factor is beyond calculation.
Politicians often rail against the complexity of the tax system as the key source of taxpayer frustration. Historically, however, voters have been unwilling to support meaningful simplification efforts and happily put up with complexity if it saves them in taxes. They seem always to fear that "simplification" is some sort of code word for raising their taxes while reducing someone else's.
Another barrier to simplification is a loss of privacy. In 2003, the Treasury Department put forward a proposal to create a return-free tax system for most taxpayers, as many other countries have. In essence, the Internal Revenue Service would calculate your taxes for you and send you a bill or a refund. The Treasury proposal went nowhere, for two reasons.
First, reporting of income and tax withholding would have to increase to provide the I.R.S. with the data needed to accurately calculate people’s taxes. But people have been highly resistant to additional withholding; a law requiring it on interest income was enacted in 1982 but almost immediately repealed after widespread complaints.
The second problem is that the tax system would have to be radically simplified to allow the return-free system to operate.
Radical simplification sounds nice in theory; just wipe the slate clean and start from scratch, many people believe. Two years ago, Alan Simpson and Erskine Bowles, co-chairmen of the National Commission on Fiscal Responsibility and Reform, put forward exactly such a plan.
It would eliminate every single deduction, exclusion and credit in the tax code, which economists call "tax expenditures," and sharply reduce tax rates to three brackets of 8, 14 and 23 percent.
The current rate structure has six brackets: 10, 15, 25, 28, 33 and 35 percent, with a 39.6 percent bracket scheduled to reappear next year. The Tax Policy Center estimates that individual tax expenditures will reduce federal revenues by $942 billion this year, while all tax expenditures, including those on the corporate side, cost $1.3 trillion.
While the Simpson-Bowles proposal continues to intrigue some people, support proved nonexistent when it was finally brought up for a vote on March 28. The entire Simpson-Bowles plan, including huge budget cuts, received only 38 votes in the House of Representatives. The New York Times reported that it was opposed by both conservative and liberal groups for various reasons.
Even if the tax side of Simpson-Bowles had been considered separately, I doubt it would have done any better. Talk is cheap when it comes to eliminating tax expenditures, but when it comes to actually naming specific preferences that would be eliminated, few are willing to step up to the plate.
Politicians hide behind grandiose plans for wiping the slate clean because they know that support for every specific tax expenditure is very high. In practice, saying that one would eliminate all tax expenditures is meaningless, nothing more than a gesture that avoids confrontation with the constituencies supporting tax expenditures.
Perhaps the worst offender, in this regard, is Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, who promises a sharp reduction in tax rates while still balancing the budget. He says that his tax cuts, which would reduce revenues by $10 trillion over the next decade over current law, according to the Tax Policy Center, would be paid for with base-broadening and loophole-closing.
But Mr. Ryan steadfastly refuses to name a single loophole that he would eliminate; he ordered the Congressional Budget Office to assume that federal revenues would rise to 19 percent of gross domestic product from 15.5 percent by 2030 under his plan.
Mr. Ryan's political calculation is simple. He knows that taking away the tax exclusion for employer-provided health insurance would greatly increase its cost and probably cause most businesses to drop coverage; repealing the mortgage-interest deduction would raise the cost of housing for homeowners and would very likely cause a further drop in home prices; abolishing the charitable-contributions deduction would decimate churches, universities, museums and every other tax-exempt organization; and rescinding the deduction for state and local taxes would vastly raise the tax burden in most states.
Mr. Ryan knows perfectly well that the most popular tax expenditures will never be repealed but pretends that they all will in order to make his phony-baloney numbers add up. The fact is that the vast bulk of tax expenditures, in dollar terms, are immensely popular and deeply imbedded in the economy and society.
A recent study by the Congressional Research Service concluded that it would be extraordinarily difficult to get rid of 90 percent of tax expenditures, leaving at most perhaps $100 billion to $150 billion of revenue that could realistically be realized to finance rate reductions.
So how do we get out of this mess? One idea is to do what Gen. Douglas MacArthur did during World War II — bypass enemy strongholds, leaving them isolated and relatively harmless.
Prof. Michael Graetz of Columbia Law School has proposed what I believe is a MacArthur-like solution to tax reform. He would abolish the income tax for the vast bulk of Americans and replace the revenue with a 12.5 percent value-added tax. People would pay their taxes when they buy things and wouldn't need to worry about keeping records or filing tax returns at all.
The brilliance of the Graetz plan is that no tax expenditures need to be repealed. He would simply give every family a tax exemption of $100,000, which would eliminate the income tax for 90 percent of those now filing returns. For lower-income people who currently have no net income tax burden or who earn an income tax credit, Professor Graetz proposes a rebate (too complex in its details to spell out here).
The current income tax would be retained with a top rate of 20 percent to 25 percent only for those with incomes above $100,000. But many of them already lose important tax preferences because the mortgage-interest deduction is capped for homes worth more than $1 million under current law and the alternative minimum tax already takes away the deduction for state and local taxes for those in high-tax states like New York.
Professor Graetz first laid out his plan in a 2002 Yale Law Journal article, which was expanded into a book in 2007, "100 Million Unnecessary Returns." A popular explanation of his plan appeared in the November/December issue of The American Interest, and a detailed analysis by the Tax Policy Center was published in January.
There are many other aspects of the Graetz plan too complex to discuss here. The important thing is the basic idea of avoiding a frontal assault on tax expenditures that is likely to make trench warfare seem tame by comparison and instead just make them irrelevant to the vast majority of Americans.
I think this is a viable proposal that ought to be the starting point for a real debate on tax reform.
E-mailPrintRecommendShare CloseTumblrDiggLinkedinRedditPermalink Bruce Bartlett, budget deficit, Daily Economist, deficit reduction, home-mortgage deduction, Income Tax, politics, Simpson-Bowles, Tax Credits, tax deductions, tax rates, Value-Added Tax Related PostsFrom EconomixWould a Higher Top Tax Rate Raise Revenues?A Close Look at the Perry Tax PlanFanning the Flames of Class WarfareHow to Avoid Reinventing the Wheel on Tax ReformBalancing the Budget, for Real Previous Post The Profits of Virtue Next Post The Incredible Shrinking Payroll// jQuery(document).ready(function($) { NYTD.commentsInstance = new EmbeddedComments($, 'NYTD.commentsInstance'); NYTD.commentsInstance.init({configName: 'default'}); }); // /**/// if ((typeof adxpos_SponLink2 == "undefined") || (typeof adxads[adxpos_SponLink2] == "undefined")) { if($("SponLink2")) { $("SponLink2").hide(); } } // /**/// if ((typeof adxpos_Position1 == "undefined") || (typeof adxads[adxpos_Position1] == "undefined")) { if($("Position1")) { $("Position1").hide(); } } //Search This Blog Search Previous Post The Profits of Virtue Next Post The Incredible Shrinking PayrollFollow This BlogTwitterRSS /**/// if ((typeof adxpos_XXL == "undefined") || (typeof adxads[adxpos_XXL] == "undefined")) { if($("XXL")) { $("XXL").hide(); } } // In order to view this feature, you must download the latest version of flash player here.var so = new SWFObject("http://graphics8.nytimes.com/packages/flash/business/20090302-econ-indicators-graphic/econIndicators.swf","nytSWF", 334,290,9,"#FFFFFF"); so.addParam("allowScriptAccess","always"); so.addParam("allowFullScreen","true"); so.addParam("BASE","http://graphics8.nytimes.com/packages/flash/business/20090302-econ-indicators-graphic/"); so.addVariable("allowCaching",true); so.write("embed70");#embed70{visibility:visible !important;}h2.multiHeadline {font-size:156% !important;padding:0px 0px 7px !important;margin:6px 6px 11px 3px !important;border-bottom:1px solid #CCCCCC !important;} /**/// if ((typeof adxpos_MiddleRight == "undefined") || (typeof adxads[adxpos_MiddleRight] == "undefined")) { if($("MiddleRight")) { $("MiddleRight").hide(); } } // Read Full Article »