taxes

Not Another No-Go Tax Reform Effort

Sigh.

Sigh. Here we go again.

The administration is putting together a task force to study options for tax reform and report back to the president by Dec. 4. After that, who knows.

 

Even the optimists among us would be forgiven for thinking this is all a pointlessexercise. After all, it was just a little over four years ago that PresidentGeorge W. Bush announced the formation of his own commission to offerrecommendations for making the tax system fairer and simpler withoutreducing revenue. At the outset Bush said he could support a flat taxand would even consider a consumption tax. The commission was supposedto report by July 2005. The deadline was pushed back twice. The groupfinally submitted its report in October of that year. And then --nothing.

Will anything be different this time around? Actually, chances are,yes. For one, a major tax bill next year is virtually assured. Obamashould have this date marked in red on his calendar: Dec. 31, 2010.After that date, the Bush tax cuts -- including the 35% top marginalincome tax rate, the 15% top rate on capital gains and dividends, and ahost of other breaks -- are supposed to be history. The current plan isto let the cuts for the top rates expire, but keep them formiddle- and lower-income taxpayers. That will take legislation, so whynot a big overhaul bill that gives the system a badly needed shakeout? If we've learned nothing elsefrom watching Obama these last few weeks, we know he's willing to thinkbig and propose big.

But not too big. That gets to another reason why there's a decentchance for a tax reform bill to pass: The type of "reform" beingcontemplated will be more doable and less revolutionary than many pastattempts that fizzled. Usually, any tax reform effort starts with buzzabout overthrowing the current code with something much more simple(but usually a lot more regressive) such as a flat tax or a consumptiontax. Obama's commission won't even try for something that radical. Don'texpect anything on the scale of  the Tax Reform Act of 1986, by far thebiggest overhaul we'd seen in decades. That law reduced the number oftax rates, broadened the tax base, got rid of a lot of deductions(remember the write-off for car loans?) and brought true reform inother areas of the code that had gotten out of hand. But Congress hasadded one break, tweak and loophole after another since then and thetax code is nearly as Byzantine as ever.

While this time there will be some stabs at simplification -- combiningthe crazy quilt of various education tax breaks into one simplifiedcredit, for example -- the focus of reform will be different. Expectefforts to close tax loopholes, which means new tax regulations forbusinesses; keep taxes low for folks at the bottom end of the incomescale, and for middle-incomers too; and raising taxes for those in theupper brackets. Big changes? Definitely. An appreciably smaller taxcode? Don't bet on it.

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