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. The latter is a huge problem, as seen in the estimated $350-billion tax gap -- the difference between what taxpayers should be paying the feds each year and what the Internal Revenue Service collects.
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 base -- 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.
The tax code should be about raising money to finance the federal government’s operations. Lawmakers should eliminate all but the most vital and effective tax breaks and tailor those as precisely as possible to the goal they want to achieve. For example, if the goal is to make homeownership affordable, why extend the break only to taxpayers who itemize their deductions, or to those buying mansions or a vacation home?
Bush’s support would be critical to the effort, but he had little to say about the advisory panel’s report. Treasury Secretary Henry M. Paulson, who is widely respected on Capitol Hill and Wall Street, needs to start championing the panel’s cause while there’s still time left in Bush’s presidency. Tax simplification was one of the signal accomplishments of Reagan’s second term; if Bush throws himself behind tax reform now, he may be able to say the same for himself.