Senators Wyden and Gregg climb aboard the tax reform bandwagon

Senators Ron Wyden (D-OR.) and Judd Gregg (R-NH) rolled out their version of a simplified, relatively low-rate individual and business tax system.

Sens. Ron Wyden (D) of Oregon (r.) and Judd Gregg (R) of New Hampshire confer before a news conference to introduce tax code reform legislation Feb. 23.

Tax reform proposals are busting out all over. Today, senators Ron Wyden (D-OR.) and Judd Gregg (R-NH) rolled out their version of a simplified, relatively low-rate individual and business tax system.

The plan retains the basic structure of the income tax and has the feel of the landmark 1986 tax reform. Yet, it tilts towards a consumption tax for businesses. As in ‘86, the goal seems to be revenue-neutral reform, rather than an attempt to raise more revenue by restructuring the Tax Code. Depending on your point of view, this could be either a missed opportunity or a sensible idea.

One downside: While the tax cuts in the plan are out there for all to see, the offsetting revenue increases are less explicit. Thus, there is at least some question about whether the plan would generate the same amount of revenue as current tax policy. Giving away tax dollars may be a nice way to attract public support, but it doesn’t make a lot of fiscal sense in an era of $1 trillion–plus deficits. 

How would the Wyden-Gregg plan work? Individuals would face three tax brackets—15 percent, 25 percent and 35 percent. The Alternative Minimum Tax would be repealed. The proposal would encourage more people to take the standard deduction by nearly tripling its size, and filing would easy for those who chose this route.

However, the proposal would retain a number of popular credits and deductions for itemizers. Among those Wyden and Gregg would keep: deductions for mortgage interest and charitable gifts, and the child credit, earned income credit, and dependent care credit.  The plan would enhance and somewhat simplify retirement savings incentives. Investors could exclude 35 percent of their capital gains from tax.

On the business side, Wyden and Gregg would reduce the corporate rate to 24 percent and eliminate unidentified targeted business tax breaks. Small businesses could immediately write off all inventory and equipment costs. Companies could deduct only part of the interest they pay, a change that could reduce the current bias that favors borrowing rather than equity finance.

The senators’ plan could be revenue neutral over 10 years, according to a rough estimate by the Congressional Research Service (the usual arbiter of these things, the Joint Committee on Taxation, did not score the plan). However, CRS warned the proposal would lose about $230 billion over 10 years unless Congress eliminated a bundle of business tax breaks. Wyden and Gregg said they favor additional loophole closers but didn’t identify them.

While the details of this plan are interesting, what’s really important is the growing number of lawmakers who are thinking about tax reform. Representative Paul Ryan (R-WI.) has introduced a reform plan (his business provisions are somewhat similar to Wyden-Gregg). House Ways & Means Committee Chair Charles Rangel (D-NY) put a plan on the table a few years ago that was also built around lower rates and a broader base. Senate Finance Committee Chair Max Baucus (D-MT) periodically expresses his interest in reform. Taxes will inevitably be considered by President Obama’s deficit commission. And, of course, we patiently await a report from the Administration’s tax reform panel.

Slowly, but surely, tax reform is creeping into the public debate. There is a long way to go, but the issue is making the transition from academics and think-tankers like us at TPC to the world of politics.  


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