With President Obama signaling interest in pushing a massive overhaul of the income tax code as a first step toward curbing the long-term growth of the national debt, law professor Richard L. Kaplan, an expert on U.S. tax policy, discusses what such an overhaul would look like in an interview with News Bureau reporter Phil Ciciora.
Why is there so much antipathy toward taxes in America right now, and how much of a groundswell is there for tax reform?
Most people despise the complexity of the tax system. Why? Well, it’s a monstrosity. Prior presidents have described it as a disgrace against the human race. Everyone thinks someone else is using that complexity to get out of paying his or her fair share, while average Americans think they’re getting the short end of the proverbial stick. So while Americans may support tax simplification as a general goal, what they really want is to pay less tax.
Who’s responsible for the runaway nature of the tax code?
The tax code gets bigger every year, but it’s not organic growth – that is, it doesn’t grow by itself. Congress enacts every change. Every single word in the Internal Revenue Code was enacted by some Congress and signed by some president, and at no point did anyone ever say: “Stop! This has gotten too unwieldy and complex.” No one does that.
In this year alone, the health care reform legislation spawned close to 200 separate income tax changes; the Small Business Jobs Act changed another 30 tax provisions. Last year’s stimulus bill made many additions to the tax code and yet it pales in significance to what was enacted in 2008 under President Bush.
Politicians try to distance themselves from the tax code’s complexity, but they voted for every addition.
How can President Obama sell the idea of tax reform to the average American?
For tax reform to have any forward momentum, the majority of people must believe that their taxes will be lower. Not just simpler, but lower. When the dust settles and people recalculate, they want to see that they’ll pay less.
Yet people really want some particular tax benefit for themselves. If that means the code gets thicker, so be it, because the majority of people are able to file their tax returns without dealing with most parts of the Internal Revenue Code. People who have small businesses, on the other hand, have a lot more difficulty. But your typical wage earner with a few investments has a relatively simple pathway through the tax code. In fact, 67 percent of taxpayers do not even itemize their deductions, so their tax return is fairly simple. It could even be on one sheet of paper.
Where it does get very complicated, however, is in tax planning – planning to fund a college education for a child, planning for retirement, planning for health care expenses, planning for investments. Those efforts are enormously complex and they affect just about everyone. But the applicable tax provisions were all deliberate policy initiatives.
So we can talk about getting rid of the home mortgage interest deduction, putting caps on pension contributions, eliminating how much you can exclude for health insurance. But the question is always going to come down to: ‘How will this affect me? Will I be paying more or less tax?’
When was the last time tax simplification was attempted, and what hurdles would it face in today’s political environment?
The last time we went through a major tax simplification effort was the Tax Reform Act of 1986, when more than 400 tax provisions were eliminated. And that did lower tax rates for everyone – the top bracket went down from 50 percent to 28. We went from 14 separate tax brackets to two.
People say that it can’t be done, that it’s too politically sensitive, that there are too many interest groups – the fact is, we have done it, and in relatively recent times. Moreover, we did it with divided government – the president was a Republican, and the House was controlled by Democrats.
So it can be done. I’m not going to say it was easy, or that it will be easy this time, because there are definitely some impediments to doing it as it was done then. First, the president has to be genuinely committed to this objective. President Reagan was extremely interested in tax simplification; one might say that he was obsessed with it. President Obama’s interest does not seem nearly so visceral. He may want to balance the budget, but that’s secondary to expanding health care and doing many other things.
Second, tax simplification is not a winner politically unless it lowers most people’s personal tax burden. President Obama’s deficit reduction commission proposed simplifying the tax system as a way of raising revenues by $1.3 trillion. That is a very different context and may prove to be too heavy a lift in the current political environment.
