Shortly after striking a deal with Republicans to renew the Bush-era tax cuts, President Obama revealed what he'd like to do for his next act: a thorough overhaul of the tax code, eliminating much of the complexity and, potentially, lowering rates while still raising revenue. His call for tax reform sent a message to disgruntled Democrats that he does, in fact, have a plan for ending the Bush-era tax cuts someday. His statements may have been just a bit of political maneuvering, but the reform he outlined would also be good policy.
Although Senate Democrats are poised to accept the tax-cut deal, many of their counterparts in the House are not. Critics worry that a temporary extension of the tax breaks for wealthy earners and estates will prove to be permanent. Unless there's a surge in the economy that puts millions of unemployed Americans back to work, defenders of the Bush approach will be able to make the same argument in 2012 that they made this year — that raising taxes on anybody would impede the sluggish recovery. Add that to lawmakers' aversion to tax increases, and you've got a formula for maintaining the status quo forever.
The prospect of major reform in the tax code, however, provides a way out from the costliest and least productive elements of the Bush-era cuts. There are a number of good ideas floating around, including some from Obama's deficit commission, to weed out most of the exemptions, credits, deductions and other "tax expenditures" that have spread through the tax code. An analysis of the commission's proposal by the nonpartisan Tax Policy Center found that it would subject more of the money earned in the U.S. to taxation, with the burden increasing as a taxpayer's income rises.
Although tax simplification has almost universal appeal, it's hard to achieve because of the entrenched interests defending practically every deduction or credit that's ever been written into law. And some of the breaks support time-honored policy objectives, such as promoting homeownership and encouraging health insurance coverage.
Nevertheless, the goal of tax reform is more achievable today than it's been in years, because the federal deficit and debt problems have put all tax expenditures in a new, harsher light. They collectively cost the federal government more than $1 trillion annually in foregone revenue, and it's long past time Congress examined whether the public gets enough in return. Simplifying the code to broaden the base, lower rates and raise revenue is part of the answer to the deficit problem. And for Democrats, it's a smart way to keep the temporary extension of the Bush-era tax cuts temporary.