Tax System Desperately Needs Fair Reform

Posted December 3, 2004 at 10:43am

As the new year approaches and a Republican-controlled White House and Congress set their sights on major tax reform, the middle class had better hold onto its wallets.

Immediately after winning re-election, President Bush declared that he had earned political capital during the campaign and that he intends to spend it. By all accounts, much of the political capital spending spree will be lavished on major tax reform. Unfortunately, that reform will take place without significant input from the taxpayers who foot the bill.

It should serve as fair warning to the middle class that the president has failed to answer even the most basic questions about the types of reform he intends to pursue. This deafening — and uncharacteristic — silence is a testament to divisions within his own party and the fact that the reforms are likely to be unpopular among ordinary Americans.

A host of tax proposals have been percolating around Washington for years, including a flat tax, a national sales tax, elimination of dividend taxes, and incremental rate reductions. If the president had adopted any of these plans or proposed a new one during the campaign, he might have been able to claim some semblance of a mandate for far-reaching reforms. Instead, he chose to keep his plan under wraps. Why?

Up to now, this president has presided over five large tax cuts that busted the budget, added layers of complexity to the tax code, and largely left the middle class out in the cold. Middle-class taxpayers have every reason to be concerned about the direction in which this latest reform effort heads.

Our tax system does desperately need reform, but that reform should be guided by three core principles:

1.) Will it add to the deficit?

2.) Will it reduce the complexity of the current tax code?

3.) Is it fair?

Revenue Neutrality. President Bush assumed office with a rare advantage: a budget surplus. He often spoke about a “Social Security lockbox” and fiscal responsibility.

But in just four years, the record surpluses he inherited from President Bill Clinton have given way to record deficits reaching nearly $415 billion in fiscal 2004. The federal debt has shot up 27 percent, and today every child in America is born owing a $6,830 “birth tax” — his or her share of the total national indebtedness.

The president’s previous efforts to alter the tax system played an enormous role in spawning this massive deficit. Last year, total tax revenues stood at their smallest share of the economy in 40 years. At the same time, the country was spending tremendous amounts of money fighting wars in Afghanistan, Iraq and the homeland.

The math just doesn’t add up, and it is imperative that any tax reform plan must not further endanger our economy by digging the deficit deeper.

Simplification. A second critical principle for reforming the tax system is to address the tax code’s pervasive complexity — complexity which has actually grown worse during the 10 years that Republicans have controlled Congress.

In the past decade, they added nearly 50 new laws with more than 3,500 changes to the tax code, contained in more than 10,000 additional pages of complex laws. By now, the tax code spans more than 60,000 pages, and the Internal Revenue Service prints more than 1,000 publications, forms and instruction booklets.

As a result, it now takes an average middle-income family almost 8 hours longer to prepare their tax return than it did in 1994. Four standard forms (Form 1040 and Schedules A, B and D) require about 28.5 hours to fill out — an increase from just more than 17 hours in 1988. The simplest form the IRS offers (the 1040EZ) takes an estimated 3 hours and 43 minutes to prepare, up from 1 hour, 31 minutes in 1988.

In his convention speech, President Bush made the predictable call for simplification, while at the same time proposing several specific reforms that would have added more complexity to the system. Any serious reform effort must devote careful attention to achieving simplification, not just paying it lip service.

Fairness. Above all else, tax reform must not serve as a guise to shift even more of the tax burden away from the wealthy and onto the backs of the middle class. Over the past four years, the president has provided enormous tax breaks for the wealthiest members of society, while middle-income taxpayers got crumbs.

This year, families in the middle 20 percent of incomes will receive an average tax cut of $647. Those earning more than $1 million will receive an average of $123,592. Last year, 80 percent of taxpayers received less than $1,500 from the president’s tax cut, while the top 1 percent of taxpayers received an average of almost $52,000.

Health care, education and housing costs are all rising, and these basic services are inching out of their reach for more families. It is unconscionable for us to tilt the playing field even further in favor of the most prosperous and against those struggling to make ends meet.

Engineering a tax reform proposal that is revenue neutral, simpler and fair takes some effort, but it is possible. I have sponsored legislation, H.R. 1939, that would drastically simplify the tax system, eliminate the Alternative Minimum Tax, provide relief for millions of middle class families and remain revenue neutral.

Any serious attempt to simplify the tax system must fix the AMT. This tax was originally intended to ensure that the wealthiest Americans did not overuse shelters to escape their fair share of taxes. But because the tax is not indexed for inflation, by the end of the decade, 30 million taxpayers will be subject to it. Millions more will be forced to spend additional hours calculating their AMT liability even if they don’t actually owe the tax.

In order to remain revenue neutral, my plan would replace the AMT with a much simpler tax on adjusted gross incomes above a certain threshold. It will eliminate over 200 lines from federal tax forms, and it will significantly reduce the time that it takes families to prepare their tax returns. It clears all three hurdles of constructive tax reform: It simplifies the tax code in a way that does not exacerbate the deficit or push new burdens onto middle-class families.

I only hope that the president’s plan can accomplish the same.

Rep. Richard Neal (D-Mass.) is a member of the Ways and Means Committee.