How to fix the US tax code

It won't be easy in a divided Washington, but there are reforms both parties can agree on and some experts think the time is 'ripe' for an overhaul.

The Internal Revenue Service headquarters in Washington.

 Fixing the US tax system might turn out to be as complicated as navigating the unfathomable code itself. Virtually everyone agrees it needs to be overhauled. The question now is whether lawmakers can come together to do it. 

The very real partisan disagreements about what changes are optimal – and the confrontational climate that often holds sway in Washington – make it difficult to turn that potential into reality. But experts on fiscal policy have offered some principles as useful guideposts in the search for solutions. Here are some to consider: 

Don’t let perfect be the enemy of good. 

Some tax-reform plans are radical in their boldness. Ditching the income tax altogether and replacing it with a national retail sales tax has been touted as a change that would boost economic growth – encouraging investment and freeing people from the effort of filing annual returns. But what some see as a perfect fix, many others see as impractical. In this example, critics say the plan would encourage black-market retailing and, in an era of high public concern about income inequality, fail to be progressive in taxing the rich.

If your reform lacks political momentum, don’t despair.

Politicians and advocates can do well by keeping discussions alive, and by tapping into the wide consensus that a tax overhaul is needed. Making the tax code better is exactly that – better than doing nothing.

Cut tax rates but broaden the base.

This principle was central to the reforms that US Rep. Dave Camp proposed on the Republican side, and it’s been embraced by President Obama as well. The idea is that you can cut tax rates for just about everyone if you also streamline the deductions, credits, and carve-outs. In other words, rates can be low when you have a wide “base” of income that is subject to taxation. The result: Tax filing gets simpler, revenue collection gets more efficient, and the economic choices made by people and businesses are less muddled by trying to game the system.

Be open-minded.

Just because tax reform is hard is no reason to focus just on small ideas. Should there be a national value-added tax? Other advanced nations have one (it’s akin to a sales tax). A carbon tax? Many economists see this as a way to accelerate the shift toward cleaner energy. Do away with cherished tax breaks? Absolutely. Some economists see the deduction for mortgage interest as a classic example – a subsidy for debt and higher home prices, rather than a real boost for household finances.

It’ll take leadership.

When Mr. Camp pitched his tax reform, he found that the inertia of the status quo is a powerful force. Objections began cropping up from lobbying groups defending the very complexity that Camp was trying to attack. “Is it more appealing to have the deductions or is it more appealing to have the lower [tax] rate?” he asks. “It’s going to be important to make the case.... It helps to have presidential leadership. Congress needs to do their work as well.” Some policy analysts say Mr. Obama has been tentative on the issue, where President Reagan was a driving force behind 1986 reforms.

Defend economic growth.

Tax experts generally don’t expect reforms to give more than a modest boost to economic growth. But perhaps the key thing is not to damage growth. If the economy isn’t growing, tax revenue won’t flow in, and taxpayers won’t be happy. Nonpartisan experts have voiced worries that tax changes proposed by some leading presidential candidates – Donald Trump and Bernie Sanders among them – could do more harm than good.

In the end, it’s about revenue.

The whole reason to have taxes in the first place is to make sure that national priorities are funded – from defense to education to the social safety net. With the US national debt forecast to rise, and already high as a share of the economy, a key test of tax reform will be how it does on this front.

But this is also the nub of a partisan rift. Republicans say the deficit habit should be contained through spending cuts. Democrats call for more tax revenue. The nonpartisan Fix the Debt campaign has called for making deficit reduction a core goal of tax reform. That would force both sides to be realistic about their plans. Many experts say that, given the rising costs of Social Security and Medicare, both spending cuts and new revenue will ultimately be needed.

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