Reinvent Our Tax Code
Posted on December 11, 2012
First published in The Hill.
Isn’t it time that we reinvent our tax code?
Negotiations over the so-called “fiscal cliff” have stalled over whether policymakers should accept 98 percent of the Bush tax cuts or 100 percent of the Bush tax cuts.
The president has staked his entire reputation on the idea that we should raise tax rates on exactly 2 percent of the American people. Republicans in Congress have been put into the unenviable position of defending those tax provisions, partly because they are worried about breaking their “no new taxes” pledge, partly because they are stubborn, partly because they want to use it as leverage to get entitlement reform and partly because they think that raising rates on job creators will kill job creation.Neither the president nor the Republicans are talking tax reform, at least in any substantive way. But that is a conversation that must happen if we are going to have real economic growth, close our deficit, and promote real fairness in the tax code.
There is a reason that Jeff Birnbaum’s classic book on lobbying, Showdown at Gucci Gulch, is enjoying a renaissance on Capitol Hill. That’s because everybody believes that the 2013 version of tax reform will mirror closely what happened in 1986, when Dan Rostenkowski and Bob Packwood hammered out their agreement, later signed by President Reagan — reform that lowered rates and got rid of deductions and loopholes.
But is that the right approach?
The problem with the 1986 Tax Reform Act was that it didn’t stick. Eventually, the loopholes came back, and as we know, some rates crept up as other rates edged down.
What if we completely revamped the tax code to make it not only simpler for people to pay, but also easier for society to compel good corporate behavior?
What if we make it a principle that everybody must pay something in federal taxes, that nobody gets off scot-free, as a citizen of the United States of America? And, I am sorry, but payroll taxes, which are dedicated (theoretically) to pay for Medicare and Social Security, don’t count, precisely because they are supposed to be dedicated to retirement programs.
What if we make it easier for companies to bring their profits home from overseas, so that money can be spent here in America to build businesses?
What if we make damn sure that we don’t do anything to destabilize the housing market, which will be the most important engine that will drive us out of our economic troubles?
What if we used the tax code to compel ethical behavior for corporate America? What if we had a lower tax rate for “green” companies than for polluters? After all, when a corporation pollutes, we all end up paying.
What if we gave preferable tax treatment to companies that create jobs in the United States, and a higher tax rate to companies that export jobs to India or China?
Shouldn’t we raise more taxes to pay for critical infrastructure? Shouldn’t we figure out a way to make users of that critical infrastructure pay more?
These ideas probably won’t be very popular with economists, who tend to want the tax code to create as little economic friction as possible. But tax policy always creates economic friction.
Right now, we have a tax code that encourages companies to keep profits overseas, that is so complicated that the wealthy can find ways to pay little, that is so generous that fully half the country pays absolutely nothing and so unfair that the middle class gets stuck with most of the tab.
We won’t get a pro-growth, pro-fairness, pro-revenue tax code by limiting the debate to a choice between 100 percent or 98 percent of the Bush tax cuts. We should use this fiscal cliff as an excuse to reinvent our tax system.