Perhaps at your house, as at mine, this is the time of year when a copy of TurboTax shows up by the computer. Or your thoughts turn to an accountant, H&R Block or another tax-help outfit. The annual season for paying the tax man his due is approaching. What better time to remind ourselves of the urgent need for tax reform, however remote it appears at the moment?
The tax code runs 70,000 pages. That’s stark evidence of what everyone acknowledges: the code is chock-full of credits, deductions, loopholes, corporate welfare and arcane provisions that do little to help — actually they hinder — economic growth.
“The fact is, the federal tax code is a dysfunctional, broken mess,” Chairman Ron Wyden of the Senate Finance Committee told the New York Times. “At a time when we want a tax system that encourages growth and innovation, what we have is this jerry-built creature where there have been thousands and thousands of changes since the last major reform.”
Yet, no one believes 2014 will be a year of comprehensive tax reform as envisioned just a few years ago by the high-profile Simpson-Bowles commission tasked by President Barack Obama to tackle the nation’s deficit woes. Obama never embraced the findings of his panel despite broad support among many of its Democratic and Republican members. The most prominent dissenter from the proposals was Chairman Paul Ryan of the House Budget Committee.
In short, a commonsense outline for tax reform combined with deficit reduction was rejected by the president because its tax increases weren’t enough, and by the GOP’s budget expert, who thought it “relies too heavily on revenue increases.” That tells you how tough achieving comprehensive tax reform will be.
Obama, in his small-ball State of the Union Address last month, proposed the worthy but limited idea of reforming the corporate tax, lowering the rate to 28 percent from 35 and reducing the deductions. That is certainly needed because the United States has the highest corporate tax rate in the industrial world.
Still, this is a proposal to help big corporations but not the majority of businesses that are small enterprises and partnerships paying business taxes through the individual income tax system. More than 30 million businesses file individual returns, but just 1.7 million pay the corporate tax rate, according to the Tax Foundation. Furthermore, it reports, all corporate tax deductions, totaling $112 billion, account for less than 10 percent of the $1.1 trillion in credits, deductions and other preferences.
Comprehensive reform would involve reducing rates, an idea counter to Obama’s soak-the-rich redistributionist mindset. Closing loopholes would deprive liberals of a fiscal lever to micromanage the economy and reward favored interest groups and pet projects like green energy. For Republicans, compromise on reform would pose the hard choice of lowering rates in exchange for letting more revenues flow to Washington. A legion of well-heeled lobbyists thrives on creating loopholes for their clients, and they will argue their tax preferences are vital to the economy.
Reform is an idea with many friends in principle, but many foes when it comes down to the nitty-gritty details of getting it done.