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On the Economy

Why tax reform is a waste of time

We can have an efficient system that serves us well if we simplify the current code by treating all income the same, closing loopholes, and sticking with the progressiveness of the current rate structure.

By Jared BernsteinGuest blogger / November 9, 2011

In this file photo, Republican presidential candidates Herman Cain, left, former Massachusetts Gov. Mitt Romney, center, and Texas Gov. Rick Perry are seen before a Republican presidential debate in Las Vegas. Bernstein argues that an overhaul of the tax system, such as both Cain and Perry are proposing, would be less helpful than adjustments to our current tax code.

Isaac Brekken/AP/File

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I’ve been thinking about tax reform lately (who hasn’t?), as in a major restructuring of our tax system.  And I’ve concluded that it’s a big waste of time.  Yes, the current system needs repair, and more to come on this, but here’s the core of the argument:

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We need a system that raises adequate revenue with the least distortions.  Those distortions, however, do not come from the rate structure, so all this junk about lower rates unleashing a growth tsunami is at its core trickle-down propaganda.

The distortions come from the loopholes, exemptions, and most of all, from all the myriad ways different types of income are defined and treated.

It should also be a system that does not amplify pretax income inequalities—i.e., it should be progressive (the CBO inequality study finds that after-tax inequality has grown faster than pretax, implying diminished progressivity of the Federal tax system).

Once you accept these simple truths, you’re free from all the mishegas about flat taxes, corporate reforms, VATs, territorial systems, etc.  Nothing against all of those—many embed smart policy thinking. 

But we can have an efficient system that serves us well if we simplify the current code by treating all income the same, regardless of its source, close distortionary loopholes (and yes, defining what’s distortionary implies an argument, but there’s actually more agreement here than you might think), and sticking with—I’d say expanding—the progressivity of the current rate structure.

So, join me on path of tax policy enlightenment, and you too will experience the bliss of liberation from all the angst of this highly fractious debate.

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