Congress Must Reform the Broken Tax Code

Weekly WastebasketCongress Must Reform the Broken Tax Code

Budget & Tax  | Quick Take
Apr 14, 2017  | 5 min read | Print Article

As if you didn’t know, tax day is right around the corner.

You do get a slight reprieve in that you don’t have to pay Uncle Sam his due until April 18th. We think about tax reform all the time, but particularly at this time of year. It’s been more than 30 years since a Democratic majority House worked with a Republican President and Republican majority Senate to enact the last comprehensive tax reform.

It’s past time to do it again.

Since the last reform passed, there have been numerous tax packages enacted, some smaller and some larger, but all led to greater complexity and inequity in the code. Earlier this year, Nina Olson, the National Taxpayer Advocate and head of the Taxpayer Advocate Services (an independent agency within the IRS) noted there have been 5,900 changes to the code since 2001, which works out to an average of more than one a day. Unsurprisingly taxpayers spend an estimated 6 billion hours a year on tax compliance.

At the same time, tax expenditures – the various deductions, credits, and other tax reducing provisions in code – now total roughly $1.4 trillion per year. That compares to a $1.2 trillion discretionary spending budget that includes all the Pentagon, Homeland Security, Veterans, Energy, and Environment spending plus a lot more. The 1986 tax reform took 14 individual tax brackets and cut it down to two and eliminated scores of tax expenditures. But there’s such a thing as tax entropy. After the 1986 act burned through the underbrush in the code like a forest fire, the thicket has regrown a lot over the last few decades.

So the answer is comprehensive tax reform. But we don’t agree with those that think it is easy – certainly not easier than health care reform. For one, since the 1986 tax reform there have been major health care changes enacted in the form of Medicare Part D (prescription drug benefit) and the Affordable Care Act (aka Obamacare). In the tax arena there have been tax cuts and tax increases but nothing was reform or comprehensive about them. Secondly, the only way to have durable reform is to get buy-in across the aisle and at both ends of Pennsylvania Avenue.

“Buy America” Provisions: The New Form of Backdoor Earmarking

Bipartisanship and Presidential leadership were hallmarks of the 1986 Act. There were two major proposals from the President (Treasury I and II). Ways and Means Committee Chairman Rostenkowski (D-IL) held hearing after hearing on tax reform, eventually hammering out a plan that had to be resurrected from death or near-death more than once. It was no different in the Senate, where Chairman Packwood (R-OR) and his top aide revived their dead plan after strategizing over a pitcher of beer at a Capitol Hill watering hole.

The point is to get the legislative gears turning and accept the lumps as they come and learn from it. Senate Majority Leader McConnell (R-KY) has already indicated that he thinks tax reform will move through a process called budget reconciliation. This is the same tool that House leadership hoped to use to push through Obamacare repeal, mostly because it isn’t subject to a filibuster in the Senate and only requires a simple majority for passage. But House leadership found out, going alone without the minority leaves very little room for error in vote counts. And there is even less room in the Senate where Republicans only enjoy a two seat majority. The better way, the lasting way to do this is the hard way of give-and-take from both parties, from both chambers and from the President.

Congress’s legislative muscles have atrophied over the years, it’s time to exercise them again. And there isn’t a worthier activity than comprehensive tax reform.