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Senator Wyden Takes on Tax Reform

3 min readBy: Gerald Prante

Jeff Birnbaum has a column in this morning’s Washington Post detailing Senator Ron Wyden’s effort to put 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 on the front burner in Congress once again, despite the essential shelving of the report from the President’s Tax Reform Panel released last November. From the Washington Post:

Sen. Ron Wyden (D-Ore.) has made it his mission to force Congress to rewrite the entire tax code. If he succeeds, every interest in town would take one side or the other in what would be the biggest legislative battle in years.

That is just fine with Wyden. The last full-scale revision of the federal income tax was 20 years ago. Since then, Congress has made about 14,000 tax-law changes, and very few of them are what anyone would call reform. A lot of the loopholes and exceptions that were excised by the Tax Reform Act of 1986 have been essentially restored.

The article then provides a great summary of the problem in Washington:

The income tax is where the country’s most powerful interests have planted some of their largest and most permanent subsidies. Lobbying groups have fought for years for their own corners of the code and they spend gigantic sums of money every year to keep them where they are. Whether they are drilling write-offs for the oil industry or foreign tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s for drug companies, there is virtually no major industry or faction in America that isn’t committed to protecting a set of highly lucrative tax benefits.

The code has become so cluttered with special privileges, however, reformers like Wyden have been able to attract a growing number of allies, including some important Republicans. One is Sen. Charles E. Grassley (R-Iowa), chairman of the tax-writing Senate Finance Committee. Another is Allan Hubbard, head of the President Bush’s National Economic Council. (Full Story)

The current tax code is in need of major fixing, and it is nice to see some members of Congress willing to take on the issue, regardless of where their proposed reforms stand in relation to various ideal tax reform proposals.

Senator Wyden’s proposal has some flaws, most notably the maintaining of the preferences for home ownership and a credit for state and local taxes paid. These two policies encourage over-investment in housing and would encourage a greater-than-optimal amount of government at the local level, respectively. That being said, unfortunately these flaws may be rooted not in an ideal policy preference, but rather the political reality that Congress faces given the strong lobbies that exists which defend these two big preferences in the tax code.

But, overall, the proposal to weed out many of the loopholes and other various deductions in the code is a good starting point for the debate on tax reform, and should get the ball rolling towards Congress passing a comprehensive tax reform package. This ideal tax code will be simple in that it limits the compliance costs associated with tax filing, equitable in that it treats all income sources equally, and pro-growth in that it limits the economic distortions created by preferences that ultimately narrow the base and raise rates paid for other economic activities.