Tax Reform and the Long-Term Budget

April 8, 2011

Tax reform is necessary. There are basically no policy experts who think that the current system is a good one. It is convoluted, costly, and economically damaging. Tax reform would get rid of the tangled web of credits, deductions, and exemptions and lower statutory tax rates.

Of course, there are other issues looming: growing deficits, the national debt, entitlements, etc. The debate here is about whether this is fundamentally a revenue issue or spending issue: Do we need more revenue or less spending, or some combination?

Often tax reform gets lumped into these long-term budget debates. The recent budget alternative proposed by Rep. Paul Ryan, Chairman of the House Budget Committee, includes tax reform (and references the President’s Deficit Commission report from December) along with all the other budgetary changes.

However, two veterans of the historic 1986 tax reform told the congressional Joint Committee on Taxation on Wednesday that while tax reform is necessary, it should be separated from the budget debate. Dick Gephardt, former U.S. House Majority Leader, and James Baker, Former Treasury Secretary, said that tax reform won’t happen unless you have both parties on board. They fear that including it in the contentious long-term budget debate will doom tax reform. “If tax reform gets caught up in that, you won’t have tax reform,” Baker said.

They make a compelling point. Revenue neutral tax reform is an end in itself. The question of the proper level of taxation is different than the question of the best structure for taxation, and the latter can be solved separately from the former. Lumping them together may be a recipe for accomplishing nothing. We can receive all the benefits from reforming the tax code and then have a debate about the proper level and distribution of taxes in the context of the long-term budget.

Blogging over at Tax.com last November in response to the President’s Deficit Commission, Martin Sullivan argued:

Tax reform is one of the most arduous tasks Congress could ever undertake. So is massive deficit reduction. What is it that makes people think that doing both simultaneously will make everything easier?


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