Seven ways to reform a broken tax system
Tax reform should include a redesign of income tax.
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5. Other tax preferences, however, are not spending programs in disguise. More and more observers have embraced the idea that tax preferences resemble spending through the tax code. That’s a promising development. Unfortunately, that enthusiasm has sometimes led to the misconception that all items identified as tax preferences are akin to spending. That’s understandable given that these items are often called “tax expenditures.” But it is not correct. Preferential tax rates on long-term capital gains and qualified dividends, for example, are (imperfect) efforts to limit the double taxation that can occur when investment income is subject to both personal and corporate taxes. Such provisions should be viewed and evaluated as tax measures, not as hidden spending programs.
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Donald B. Marron is director of the Urban-Brookings Tax Policy Center. He previously served as a member of the President's Council of Economic Advisers and as acting director of the Congressional Budget Office.
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6. Many tax preferences provide benefits to millions of taxpayers; they aren’t just “tax breaks for special interests.” For example, the three largest tax preferences are the exclusion for employer-provided health insurance, preferences for retirement saving, and the mortgage interest deduction. Americans should understand that to get the benefits of tax reform – lower rates, simpler taxes, and a more vibrant economy – they will need to give up some popular tax breaks.
7. Policymakers should re-evaluate the design of any tax preferences that they decide to keep. Some preferences are needlessly complex and could be simplified; that’s true, for example, of the preferences aimed at low-income workers and families. Other preferences might operate more efficiently as credits rather than as deductions or exclusions. Credits can provide more uniform incentives to particular activities – e.g., homeownership – than deductions or exclusions whose value depends on whether a taxpayer itemizes and what tax bracket they are in.
Bottom line: By reducing, eliminating, or redesigning many tax preferences, policymakers can:
- Make the tax system simpler, fairer, and more conducive to America’s future prosperity;
- Raise revenues to finance both across-the-board tax cuts and much-needed deficit reduction; and
- Improve the efficiency and fairness of any remaining preferences.
P.S. The other witnesses included two other Tax Policy Center folks – former director Rosanne Altshuler and co-founder Gene Steuerle — and Larry Lindsey. All our testimonies are available here.
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