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Straight Story: Taxing time

Chris Farrell

KAI RYSSDAL:
It is time once again for our economics editor, Chris Farrell, to help you sort out what is smart, what is stupid and what's the straight story. This week, Chris, I'm sorry it's the myth of Sisyphus. What are we doing?

CHRIS FARRELL:
Kai, we're not just a personal finance show.

RYSSDAL:
No, we're not.

FARRELL:
We delve into history. Now the Greek gods…

RYSSDAL:
Yes.

FARRELL:
…condemned Sisyphus to endlessly roll a rock up a mountain, but just as he neared the top, the rock would always fall back and he had to start over again and again.

RYSSDAL:
All right.

FARRELL:
Well, I feel like Sisyphus whenever I call for income tax reform.

RYSSDAL:
All right, I get it now.

FARRELL:
I've been bringing it up for years, but reform never comes. And it's especially frustrating because the reason for reform is simple: millions of Americans can't figure out what they owe. We waste billions of hours and billions of dollars complying with a tax code that's way too complicated. So, as the government gears up to debate various tax issues, here's the straight story. Simplify, simplify, simplify.

RYSSDAL:
Easy thing to say, simple in fact even to say.

FARRELL:
At least you didn't say simpleton.

RYSSDAL:
Well you said it, not me. How are you going to do that with a tax code that, I mean I'm just guessing here, probably runs to thousands of pages.

FARRELL:
Oh the tax code--and it not only runs to thousands of pages but the number of pages in the federal tax code have increased by about 42percent since 2000. So it's been getting worse every year. How do you do it? One, let's forget radical tax reform. I mean, you know, the flat tax, the national sales tax--I mean the proponents remind me of, you know, Marx and his communist utopia or Herbert Spencer and social Darwinism. Yes, there is some nirvana out there, but we're not going to get there very easily and all kinds of disruptions. So let's just go with what we have and simplify it. And a starting place? The president did appoint a bipartisan blue chip panel, tax reform commission came out 2005 with it's report. And just to give one example--the tax reform commission would take the number of schedules and worksheets from 52 to 10. Now I define that as simplification. So there's the baseline right there.

RYSSDAL:
Okay fine, baseline granted. But here's the thing, the president had a big speech this week. Maybe you heard it. It's called the State of the Union.

FARRELL:
Yes, I did.

RYSSDAL:
Okay, he talked about a lot of things, one of which was not tax reform.

FARRELL:
You're absolutely right. There was no mention this year of tax reform at all. So yes, this is not high on everybody's list, but I have a secret weapon. It's called the alternative minimum tax. The alternative minimum tax will put enormous pressure for reform. I mean if nothing is done with this AMT…

RYSSDAL:
Let's remind folks what it is.

FARRELL:
All right. What it is, it's essentially a second tax code that says if you take advantage of too many deductions and credits, we're going to remove those deductions and credits and hit you with a tax. And it was designed to hit the really wealthy who are avoiding tax and there's a lot of outrage. And now the alternative minimum tax, because it hasn't been adjusted for inflation is hitting into the upper middle class. And by the way, by 2010 if there's nothing done, it'll hit about 30 million tax payers. And we're not just talking about the wealthy and the upper middle class, we're talking about the middle class.

RYSSDAL:
Okay, but everything I read, and in fact you and I have talked about this before--getting rid of the AMT in some way, shape or form is going to cost the treasury tens of billions, maybe even trillions of dollars over the next 15, 20 years, whatever it is, which is sort of a roundabout way of getting to the larger point, which is can you simplify the tax code without doing damage to the budget deficit.

FARRELL:
Well, I would simplify the tax code and raise the amount of money that you need. What I say is look, there are probably two things that are so ingrained in our society you don't want to dramatically change them. You're going to give a benefit to homeowners and a benefit for charitable giving. And then you just get rid of all the deductions and the credits that you can and in return you say to the taxpayer, we're going to broaden the tax system. We'll lower the rates as much as possible. That's the trade off that you get for simplification and we'll raise the money that we need to attack this budget deficit at the same time. So I think tax simplification is going to be the way to deal with the AMT and by the way, the long term budget problem.

RYSSDAL:
Yeah, not so simple now is it. The straight story from our man Chris Farrell. Thank you, Chris.

FARRELL:
Thanks, Kai.

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