As recriminations and partisan rancor continue to dominate the aftermath of the recent shutdown crisis, the narrow aversion of catastrophe has also meant the start of work for a group of lawmakers tasked with crafting a consensus on the long-term fiscal future of the United States.
It seems credible — and potentially even likely — that the budget conference will fail to reach an agreement that would avert another showdown in just a few months time. It’s clear, however, where they need to start.
Totaling nearly 4 million words, America’s tax code is both bloated and strikingly open to manipulation. Businesses and individuals spend more than 6 billion hours a year complying with filing requirements — the equivalent of nearly 3 million full-time jobs — and the amount saved by tax breaks, such as those granted for mortgage interest payments, nearly matches the federal government’s income tax receipts.
The tax code’s flaws extend beyond complexity and omissions too. While the current top marginal tax rate of 39.6 percent is far below the 94 percent rate encountered in 1944, America has one of the most “progressive” tax systems in the developed world, in terms of the proportion of the overall tax burden exacted from the wealthiest 10 percent. Conversely, nearly half of Americans pay no federal income taxes whatsoever.
Some tax reform proposals have more merit than others, of course. A White House proposal that would raise corporate tax rates — already the highest among Organization for Economic Cooperation and Development nations — in order to fund infrastructure investments would in reality affect only a relatively minor component of overall federal revenues while discouraging private sector growth in a lethargic economy.
Similarly, Republican proposals to scrap income taxes altogether and rely on higher sales taxes are both fiscally unsustainable and perilously punitive to the poor.
There are some common-sense measures that the budget conference might identify as a solid starting point. Closing tax loopholes such as those granted to the owners of private jets, for example, offers political appeal and an easily quantifiable impact. Such measures are however generally insufficient in scale to have notable effects on the government’s long-term revenue outlook.
More ambitious efforts remain subject, however, to partisan intransigence, and not only that exemplified by GOP inflexibility over any sort of reform that would raise revenue totals in any way.
The concept that contributing more value to the economy — and that the government, rather than the income earner himself, is the natural recipient of income gained — equates to an ability to “patriotically” pay more of one’s “fair share” has gained inexplicable traction.
Similarly, the call for higher capital gains taxes — levied, essentially, on income already subjected to taxation that has subsequently been actively invested in furthering economic growth — may have a certain political appeal but little grounding in concepts of equitable treatment.
The difficulty of addressing tax reform in a nonpartisan manner is perhaps demonstrated best by the fate of the Bowles-Simpson Deficit Reduction Plan. The plan — put forward at President Obama’s request — would simplify the tax codes while slashing personal and corporate rates and eliminating loopholes, all while producing revenue gains that could subsequently be used for deficit reduction.
More than any other proposal, Bowles-Simpson offers a clear step in the right direction that irritates both parties just the right amount — and has subsequently gone nowhere.
There’s clearly a need for both parties to break away from partisan preferences in exploring tax reform, and clearly room for progress to be made. In the end, however, even successful tax reform would pale in significance and impact compared to successful entitlement reform — and the latter makes the former look easy.
Contact Marshall Watkins at mtwatkins ‘at’ stanford.edu