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Tax Reform by Another Name
Tax Notes
February 20, 2006
By Ernest S. Christian and Gary A. Robbins
The term "tax reform" is now so loaded down with
political and intellectual baggage that it is perhaps time
to furl that tattered old banner and start talking about what
we really mean. A report by a blue-ribbon panel on "Correcting
Dumb Tax Rules That Make America Poorer" would be both
more to the point and harder to ignore than a report on tax
reform. Congressional committee hearings on subjects including
rescuing baby boomers from old-age poverty, how the tax code
stifles wage growth, and the tax threat to American hegemony
in a world economy would attract more attention than the typically
sleepy afternoon sessions on tax reform.
Tax reform started to get off track some years ago when
many of its advocates became fixated on the totally impolitic
and unnecessary idea of repealing the personal deductions
for charitable giving and home mortgage interest. Because
of those in-your-face negatives, many political strategists
consider tax reform a high-risk proposition. For example,
when word got out that the President's Advisory Panel on Federal
Tax Reform was "messing" with charities and mortgage
interest, the resulting furor in the press almost buried the
panel's highly meritorious pro-growth recommendations to remove
double taxes from savings and investment.
Tax reform has also been the victim of rhetorical excesses
by many of its dedicated proponents. Ringing denunciations
of the current tax code, promises to tear it up and start
over, and too much confusing academic jargon all combined
to make tax reform seem far more radical and experimental
than it really is. That distorted picture -- and the absence
of any great groundswell for tax reform (as distinguished
from tax cuts) -- persuaded many politicians that tax reform
is a subject best postponed until some unspecified future
date.
Future efforts to remove tax barriers to economic growth
must start where the realpolitik of the tax code resides --
in the workaday world of Congress's taxwriting committees.
The chances are actually fairly good. The temporary tax cuts
enacted over the past few years will probably be made permanent
for the simple reason that the alternative is a politically
unacceptable tax increase. Another good bet is partial and
ultimately full first-year expensing for business capital
equipment. That is a genuine blue-collar tax reform that has
long had bipartisan appeal and that over time is free of any
revenue cost. (The accountants are not enthusiastic because
expensing cannot be shown as a "tax cut" on the
books -- but such fancy-pants niggling is not likely to trump
the big boost to productivity and wage growth that expensing
provides.)
The political prognosis for continuing to raise and for
ultimately eliminating the contribution caps on Roth IRAs
and nonretirement savings vehicles is also good. With a 15
percent maximum tax on dividends and gains in general, the
revenue cost of exempting the yield on tax-preferred savings
is not great. And with the personal saving rate in America
having fallen below zero, Congress will be under pressure
to act. Over the longer term, more private saving has to be
part of any sensible response Congress makes to the declining
role and vitality of Social Security.
On the international side of things, many members of Congress
probably will want to make two other game-changing alterations
to the tax code -- just as soon as they sort out the confusion
about border tax adjustments. First, they will want U.S. companies
that export or otherwise compete in foreign markets not to
be penalized by America's own tax laws. ("Let's export
American products, not American jobs!") Second, they
will want to expand the tax base to include foreign companies
that get the benefits of the U.S. economy without paying U.S.
taxes. If the taxwriting committees can fend off the spenders,
the added revenues from base-broadening could then be used
to pay for the other improvements to the tax code. (What politician
could resist a $60 billion to $100 billion tax cut for Americans
paid for by voteless foreigners?)
Those are the kinds of tax changes that members of Congress
can successfully talk about at town meetings, county fairs,
and the other grass-roots occasions that make politics in
America work. People can understand that the whole purpose
is to provide jobs and the bigger paychecks that send kids
to college and pay the mortgage. At that point, the politics
of tax reform will become the good politics of economic growth.
Ernest S. Christian and Gary A. Robbins are, respectively,
the executive director and chief economist of the Center for
Strategic Tax Reform, a Washington-based organization that
has for more than a decade been doing research on tax reform
options. Both now are also visiting fellows at the Heritage
Foundation in a project focused on the relationship between
tax reform, economic growth, and personal liberty.
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