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Is major tax reform coming?

Chris Farrell Feb 1, 2012

Have you started your taxes? Gathered the information to file online? How about made an appointment with your accountant?

For me, the answers are … (hemming and hawing …)

(Looking around the office …)

(Clearing throat …)

No. No. No. But hopefully soon. Very soon.

No one is happy with the tax code. It’s complex. It’s unfair. The latest reminder is the dust-up over Mitt Romney’s 2010 tax return, which showed him to have an effective tax rate of 13.9 percent on his 2010 income of $21.6 million (and which was accompanied by an estimate of an effective rate of 15.4 percent on 2011 income of $20.9 million).

There’s good reason to throw a spotlight on capital gains — specifically, the lower tax rate on capital gains investments vs. ordinary income. It’s why Romney’s rate was so low. But in a Bloomberg Businesweek article, I argue why should it stop at capital gains? How about embracing major tax reform: 

Since at least the 1930s, tax reformers have pushed for a much simpler system that is more equitable and efficient. Simplicity requires broadening the tax base by eliminating as many credits and deductions, phase-ins and phase-outs as possible. A simpler tax code is more equitable because those with equal incomes — no matter what the source — would pay the same tax. And since filling out the form would be so easy, it could be dubbed the Tax Lawyer and Accountant Unemployment Act. The political debate could then focus on how progressive to keep the system and how high rates should go to pay the government’s current and future liabilities.  

In addition to capital gains, how about targeting the mortgage interest deduction and other major loopholes: deductions and credits? Of course, nothing is going to happen in an election year.

Like it or not, some form of major tax change is coming over the next several years. The reason is well-known: The federal government’s dire long-term fiscal situation. The real question is what kind of tax overhaul. The major bipartisan deficit reduction plans rely on broadening the tax base. For example, both Bowles-Simpson and the Bipartisan Policy Center’s sweeping budget overhaul, sponsored by former Republican Senate Budget Committee Chairman Pete Domenici and former Clinton budget director Alice Rivlin, would tax capital gains at the same rate as ordinary income. They also want a bunch of well-known, economy-distorting tax expenditures to be eliminated or slashed.  

Isn’t this the kind of discussion we should be having? I think so.

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