Come January, Tax Simplification Should Be Washington's Focus
When the new Congress convenes in January there will be a new dynamic at play, with the Republican-controlled legislature squaring off against a Democrat administration. Clearly, there should be opportunities for Republicans to coalesce behind popular reforms that may have been stymied by Harry Reid's Senate. Of these, tax reform is perhaps most sorely needed, but will the new Congress be willing to tackle the current tax code? Judging by the comments from incoming Senate Finance Committee Chairman Orrin Hatch, the outlook may be bleak.
While Sen. Hatch claims that tax reform is his "highest priority," he quickly downplays expectations for any massive overhaul of the current system. In the introduction to the Finance Committee's recent report on comprehensive tax reform, the Senate's top tax man writes: "It will involve balancing countless interests and making difficult choices among numerous competing priorities. In fact, despite the number of specific proposals that are out there, I don't know that we've even scratched the surface on the degree of difficulty we face when it comes to tax reform." In other words, the lobbyists and tax lawyers that created the current morass that is the federal tax code will view any attempts at simplification and reform with a jaundiced eye.
While reform may be difficult, that does not mean that it not urgently needed. By almost any measure, the federal tax code is a dramatic failure. It is burdensome, unfair, opaque, and highly inefficient in the way it collects revenue. In other words, the current tax code violates every precept of public finance. Economists have long argued that the tax system should be simple, fair, and efficient; indeed, these are the principles outlined in 1776 by Adam Smith, the founder of modern economics.
The tax code's problems are not just the bane of taxpayers; they are distortionary, with significant implications for economic growth and global competitiveness. The United States now has the highest corporate tax among all OECD nations and is one of the few nations that rely on a system of worldwide taxation. Such policies distort investment decisions and are a primary source for the increase in corporate inversions that push jobs and investment overseas to more taxpayer-friendly environments. Addressing these issues requires fundamental reform, not new legislation that adds more layers to the already incomprehensible tax code.
The tax code hits people, too. According to the federal government's information collection budget, Americans spent 9.45 billion hours in 2013 complying with all federal paperwork. Of this, more than 6 billion hours are attributed solely to the burden of filing taxes. At the same time, the tax burden is not shared equally. The number of taxpayers with no liability or receiving a refundable tax credit is approaching 50 percent, and tax expenditures-various exclusions, exemptions and deductions-for favored policies or interest group-are now more than $1 trillion annually.
In fact, the federal tax code has become burdensome and unfathomable. Rather than simply collecting the revenues required to run the federal government in a fair and transparent manner, the tax code has become a tool of social policy, attempting to use benefits and penalties to promote favored industries or policies while discouraging others. Social engineering through the tax code has only made it more complicated and more unfair. Similarly situated neighbors may face wildly different taxes depending on their circumstances. At the same time, distortionary tax policies can skew investment and consumption decisions, misallocating resources and slowing economic growth.
For too long, the only tax debate in Congress has been whether to pass a collection of "tax extenders," an assortment of provisions that provide special treatment for everything from research and development to tax credits for wind energy. While the perennial lobbying may benefit members of Congress, it does little for the average taxpayer. And it does virtually nothing to address the underlying problems of the federal tax code. What is needed is fundamental reform that includes a degree of permanence that allows for more effective tax planning.
Both Congress and the administration have acknowledged tax reform as an important issue. Currently, most discussion has focused on corporate tax reform, but the problems reach well beyond this one particular set of tax issues. Broader, more comprehensive reform is necessary. If tax reform truly is the highest priority, the new Congress should not settle for less than fundamental reform that provides a simpler, fairer, and more transparent tax code.
