Friday, December 10, 2010

The President and Tax Reform

I found the President's remarks on Tax Reform generally positive yesterday.  He commented that he was beginning to think about proposing to simplify the tax code next year in a dual strategy to improve the code and to raise revenue.   That is the approach followed by President Reagan in the 1986 tax act and it was a sound one then.  It would be a sound one now too.

But there are some caution lights on this approach.  The first, could be heard in both the NYT coverage and an NPR piece on it.   There is only one way to simplify the tax code - that is by cutting the thatch out of the code.  The Deficit Reduction Commission proposed to eliminate virtually all of the deductions in the code (save the Charitable Deduction and a Mortgage Interest Deduction for a Principal Residence) which is a good place to start.   But some in the equity crowd have argued a different approach, namely capping in some way the application of deductions for high income taxpayers.   That approach does nothing to reduce the burden of the tax code, indeed, it increases the complexity of the code.  Look at the machinations around the "marriage penalty" to understand the truth of the statement.

Broadening the base is never easy.  But the 1986 process proved it could be successful both politically and economically.  If the President wants to recoup at least some of his clout on economic issues he will need to avoid the people in his administration who see the tax code as an opportunity to foment class warfare.

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