Tax Reform Turns 30

Weekly WastebasketTax Reform Turns 30

Budget & Tax  | Quick Takes
Oct 21, 2016  | 5 min read

The presidential election is 17 days away. Whoever wins will face a range of difficult issues, including the politically perilous task of reforming the federal tax code.  On October 22, it will have been 30 years since Congress and the president came together to tackle tax reform. Yet, there is a rare consensus that the federal tax code must be overhauled, and even bipartisan agreement on specific reforms.

One area of agreement is corporate taxes. Corporate tax policy is hurting U.S. competitiveness and economic growth. Productivity growth, workforce participation, and median household income have been on the decline since the late 1990s. Increasing globalization has intensified the problems with our corporate tax code, particularly the high U.S. corporate tax rate and our system of taxing international income. Not only is reforming the tax code critical to improving U.S. competitiveness, it is essential to achieving a sustainable federal budget.

The path forward begins with Congress and the next president spending some political capital on bringing about meaningful reform. Without Congress, presidential tax reform plans are political documents – useful in telling us where a candidate stands in the broadest terms, but meaningless in the sense that they don’t tell us how changes will actually be paid for and how they will affect the long term deficit and debt. And no matter how detailed an outline, things don’t get serious until a lawmaker actually puts a proposal into legislation and receives a budget score from the Joint Committee on Taxation and the Congressional Budget Office. And, as we learned in 1986, the president has to keep the focus on getting it done.

One good way for Congress and the president to start is to find common ground. In pursuit of lowering corporate tax rates, Congress should zero in on the ill-targeted policies that have done little except make the tax code more complicated and unfair. We have been saying for years that the specific breaks the oil and gas industry enjoy are a good target (and survived the 1986 reform), but there are many others ranging from eliminating the manufacturing deduction (Sec. 199) to reforming the mortgage interest deduction in both the personal and corporate tax code.

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Then there are the so-called tax extenders. In the omnibus spending bill enacted last December, or Taxibus, both parties repeated the longstanding practice of enacting short term extensions for several special interest provisions and for the first time made permanent several other provisions – all without budget offsets. But this concept that certain tax expenditures can be renewed repeatedly masks their true cost and dampens the appetite for the more difficult but needed comprehensive reform. Predictability is an important element of taxes. Individuals and companies need it to make rational spending decisions and lawmakers need it to know the cost of policies. Both sides of the aisle should agree to stop this practice.

Indeed, a lot has already been done. The blueprint for reform proposed by House Ways and Means Committee Chairman Kevin Brady, R-Texas, along with the principles articulated by ranking member Rep. Sander Levin, D-Mich., are useful, serious work. Before that, former Senate Budget Committee Chairman Max Baucus (D-MT) and House Ways and Means Committee Chairman David Camp (R-MI) put forth broad proposals that included significant areas of agreement.

Unfortunately, the presidential election had deepened the political divide, making an already difficult task even more daunting. Not enough has been said about the real problems that are causing economic pain. Whatever the outcome of the presidential election, Congress and the president will be under increasing pressure to break the political deadlock that has characterized the last few years in Washington. And a significant reason is the continuing erosion of economic indicators that have galvanized the electorate. If our political leaders do take these issues seriously, they will find a way to come together on the critical issue of tax reform.