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New Congress Faces Opportunity on Tax Reform

2 min readBy: Andrew Chamberlain

TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform may be a stalled issue in Washington, but it is alive and well outside the Beltway. This morning, the editorial board of the Los Angeles Times officially threw down the gauntlet on fundamental tax reform, declaring that “twenty years after the Tax Reform Act, the law is as muddled as ever.” From the piece:

TWENTY YEARS have passed since President Reagan signed the landmark Tax Reform Act of 1986, a bipartisan effort to simplify the egregiously complex federal tax code. Since then, Washington has taken about 15,000 steps backward — enacting an average of 750 new or modified exemptions, deductions and other wrinkles to tax law every year. The code not only grew more burdensome, it became less efficient, more likely to distort markets and more prone to evasion…

In short, it’s time for Congress to take another stab at a major rewrite of the tax code that eliminates most of the preferences and loopholes. By broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. — in other words, requiring more corporate and personal income to be taxed — lawmakers can lower rates without reducing the total amount collected by the IRS.

A blue-ribbon advisory panel led by former Sens. Connie Mack (R-Fla.) and John Breaux (D-La.) last year called for this kind of approach, floating a proposal to reduce the number of individual tax breaks and to vastly simplify the recordkeeping done by businesses. Although there are some differences on the details, the concept’s backers include both conservatives and liberals. Two Democrats — Sen. Ron Wyden of Oregon and Rep. Rahm Emanuel of Illinois — have introduced bills that would simplify and flatten federal taxes even more drastically.

In the coming year, the new Democratic majority will have an unusually strong incentive to work with Republicans on fundamental tax reform. More than five dozen tax breaks passed in President Bush’s first term are set to expire over the next four years, while the number of filers subject to the dreaded alternative minimum tax will mushroom from 4 million in 2006 to 22 million in 2007. If Democrats don’t act, they risk being pilloried for raising taxes. A revenue-neutral measure that dramatically simplified the tax code would effectively change the subject. (Read the full piece here).

For their efforts on the President’s tax reform panel, just last week the Tax Foundation jointly awarded its annual Distinguished Service Award to Sens. Connie Mack and John Breaux. Also, we interviewed Sen. Ron Wyden (D-Oregon) about his tax reform plan for our Tax Policy Podcast in October.

The bottom line: there are plenty of excellent, bi-partisan tax reform ideas circulating in policy circles right now. Let’s hope the new Congress picks up on them, and moves forward on tax reform in the coming year.