Tax Foundation Testifies on Need for Fundamental Tax Reform

March 12, 2011

On March 9 Tax Foundation president Scott A. Hodge will testify before the Senate Budget Committee, explaining the assemblage of deductions and provisions in the federal tax system known collectively as “tax expenditures.” This category includes business provisions, like the deduction for research and development; individual provisions, like the mortgage interest deduction for homeowners; as well as provisions that function as aid to state and local governments.

The hearing, “Distribution and Efficiency of Spending in the Tax Code,” will clarify for Senators and attendees the size of major tax provisions and who is eligible for them, and provide options for comprehensive tax reform in the current Congress. Hodge will also emphasize the increasing use of tax policy to implement social and economic policies unrelated to raising revenue.

“The U.S. tax system is in desperate need of simplification and reform,” said Hodge. “The relentless growth of credits and deductions over the past 20 years has made the IRS a super-agency, engaged in policies as unrelated as delivering welfare benefits to subsidizing the manufacture of energy efficient refrigerators.”

Parallel to the growth of specialized tax provisions is the trend towards fewer and fewer Americans paying any federal income tax at all. Due to the growth of refundable tax credits, an increasing percentage of the American public now has a zero tax liability, or receives net payments from the federal government. Thirty-six percent of filers currently pay no federal income taxes – a number that rises to 48 percent if we include all Americans who earn income, whether they file or not.

The current system of tax expenditures creates a number of systemic problems – from misallocation of business investment and dependency on government payments to the ongoing crises in the realms of health care, housing, and state and local government finances. Only a broad, fundamental tax reform effort can reverse this damage.

“While tax cuts will always curry more favor with voters than new spending programs, Washington needs to call a truce to using the tax code for social or economic goals,” said Hodge. “The consequence of trying to micromanage the economy as well as individual citizens’ behavior through the tax code is a narrow tax base and unnecessarily high tax rates. These high rates are endangering America’s global competitiveness and undermining the nation’s long-term economic growth."

The full text of Scott Hodge’s testimony before the Senate Budget Committee is available here.

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