Tax Reform That Is Kept Simple Presents A
Win-Win Opportunity (First In A Series)
Investor's Business Daily
February 1, 2005
By Ernest S. Christian
By appointing a distinguished advisory panel to help him
fix the U.S. tax code, President Bush has given tax reform
an extra shot of gravitas and, in the process, rescued it
from the policy wonks. From now on, pencils should be sharper,
thinking more precise, and the focus more on real world reforms
that the Congress can reasonably be expected to enact in 2006.
Tax reform is not the complex, Herculean task that many have
thought. The half dozen aberrations in the tax code that are
most damaging to economic growth are also sources of much
tax complexity. Remove the most egregious impediments to economic
growth and get major simplification as a free byproduct. Not
a bad deal.
Indeed, if government tax revenues can be raised in ways
that are fair, simple and better
for the economy, what, pray tell, could be the excuse for
not taking advantage of
this win-win opportunity?
Nearly all tax reform options eliminate the Double taxation
of saving, investment and international trade, and, in the
process, cut out big chunks of complexity as well.
If the dozen different IRA and 401(k) variations in the current
code are replaced with a better alternative that really does
eliminate the double tax on saving - as tax reform promises
to do - the tax code and regulations will shrink by more than
1,100 extraordinarily complex pages.
Replacing the current code's half-dozen different depreciation
systems with simple and effective first-year expensing for
machinery and equipment will cut out another 400 pages of
code and regulations that put a double whammy on the economy:
The existing depreciation rules impede investment and constrain
productivity, and they increase compliance costs enormously.
A straightforward exclusion of export income will moot another
100 to 200 pages
occupied by several overlapping, partially irrelevant and
generally failed "Rube Goldberg" schemes that have
cluttered up the tax code for decades.
One, called FSC/ETI, kept the Congress and the international
business community tied in knots for two years before being
repealed. Now U.S. Treasury officials say they cannot figure
out how to administer Congress' most recently enacted attempt
to temper slightly the continuing harm to U.S. manufacturers
that comes from exports being taxed twice (once here and again
in the country of destination).
In addition to fixing the export situation (where U.S. businesses
produce here and sell abroad), some tax reform options do
away with the tax code's archaic two-tax regime for income
earned when a U.S. business produces abroad and sells abroad.
There are 950 pages of rules about such "foreign source"
income. Most hamper the ability of U.S. companies to compete
in global markets. Few appear to raise any tax revenues. Critics
say they cost tax revenues.
Experiments in the 1990s indicate that eliminating double
taxation, in combination
with other simplifications and a plain-English rewrite of
the tax law, will halve the
size of the Internal Revenue Code.
Concentrating tax reform on eliminating double taxation also
provides the most bang for the buck in terms of economic growth.
For example, for each $1 of static revenue cost, switching
from depreciation to first year expensing will produce roughly
$9 more GDP, and switching from double to single taxation
of personal saving will produce $4 to $7 more GDP-but a traditional
corporate rate cut would produce only about $2.70 more GDP.
Relief from double taxation, in combination with recently
enacted cuts in high personal
tax rates, ought to make it politically possible to do some
judicious "loophole"-closing - certainly enough
to pay for abolishing the now notorious alternative minimum
All told, there is a list of more than $2 trillion in loopholes
to choose from, not including the deductions for home mortgage
interest and charitable giving that President
Bush has properly taken off the list.
Squeezing the list a little harder would also pay for the
remaining $400 billion-$500 billion 10-year static revenue
cost of tax reform - but that may not be necessary.
Once the advisory panel and Congress really start sorting
through the core components
of tax reform, they may find one or two "silver bullets"
that not only provide sufficient
offsetting tax revenues, but are potentially good policy and
good politics as well. (A subsequent column in this series
will explore several hypothetical possibilities.)
Revenue-neutral tax reform will entail tax increases as well
as tax decreases, and, because of that, much astute political
maneuvering will be required. The most hopeful
prospect is that, counting back to the Bush tax cuts in 2001
when tax reform really
began, the overall mixture of tax pluses and minuses will
leave most important constituencies net better off by enough
of a margin to keep tax reform moving forward intact.
The further hope is that when explained to them in plain
English, the American people will buy on to the idea-and see,
despite all the Beltway folderol, that tax reform is a simple
process made up of familiar components, and is economically
smart. If so, good economics will become good politics and
tax reform will succeed.
Christian is a former Treasury tax official who is now
director of the Center For Strategic Tax Reform in Washington,