Time to ‘Experiment’ With Tax Reform

Posted February 10, 2008 at 11:00pm

The conversation in Washington, D.C., this month is rightly focused on the bipartisan economic stimulus proposal. With more disappointing economic news this past week, cash rebates and business purchasing incentives may provide just the shot in the arm our flagging economy needs. But as we look forward to our agenda for the rest of the year, I think tax simplification and reform is one area where Congress could assuage the concerns of millions of working families.

Ben Franklin said, “We are, I think, in the right road of improvement, for we are making experiments.” While many complain about

our current federal income tax system, few have been willing to step forward and “experiment,” as Franklin would say. One who has is Ways and Means Chairman Charlie Rangel (D-N.Y.), who recently offered the boldest tax reform initiative since the 1986 Tax Reform Act. His bill would cut taxes for more than 90 million American families making less than $500,000. His plan, the Tax Reduction and Reform Act, also would reduce the corporate tax rate from 35 percent to 30.5 percent.

What makes this plan so bold is that it is completely revenue-neutral. Others have offered revenue-neutral reform proposals, but few have actually backed it up with enough credibility as Rangel has done. One who may be willing to engage is Treasury Secretary Henry Paulson, who came forward last year to endorse the concept of simplification for business taxpayers. His proposal was to lower the business rate of tax and eliminate special preferences. Some companies spoke up in favor of this approach, saying they would gladly trade in special incentives they utilize in order to secure a simpler tax code and a lower overall rate.

I am encouraged by Rangel’s reform proposal and hope to hold hearings this year in the Ways and Means Subcommittee on Select Revenue Measures so that we can solicit comments from practitioners, businesses and other advocates on this and Paulson’s suggestions. However, I am discouraged by the philosophical objections from the White House and elsewhere about revenue increases.

It is not clear to me what would happen if we presented a revenue-neutral tax bill to the president for his signature. With such strident opposition thus far to tax increases, what would he do with a suggestion, such as Paulson’s, to lower rates and offset the cost by eliminating business tax preferences? What would he do with a proposal, such as Rangel’s, to eliminate the onerous alternative minimum tax for 20 million American households and increase the standard deduction for 50 million families, but offset the cost with a slightly higher burden on 1 million of our wealthiest taxpayers?

It is impossible to negotiate with theological reactions against any proposal that cuts taxes on some and raises taxes on others. German author Johann Goethe wrote, “Daring ideas are like chessmen moved forward; they may be beaten, but they may start a winning game.” We have to look at the whole and see the endgame, as Goethe warned. This should especially apply to bold and daring proposals, such as Rangel’s bill.

And if we want to accomplish tax reform, we have to let go of concepts such as tax cuts paying for themselves. I asked the experts at the Joint Taxation Committee to review not only their own macroeconomic analyses, but also work by other governmental agencies and academics on the question of whether tax cuts produce sufficient economic growth to fully offset the revenue loss. After careful review, the JCT experts concluded, “[T]he body of this work finds that while some tax cuts are better than others, even the ‘best’ tax cuts, under the most optimistic scenarios, do not pay for themselves.”

With so much talk from the Republican presidential candidates about what Ronald Reagan would do or what he would say, it is important to remember what he did: simplified the code, lowered the rates and eliminated special preferences. Still, this incredible achievement (with a GOP president supporting tax increases on some and tax cuts for others) should not be considered “fundamental” tax reform. The 1986 act merely simplified and improved the existing system, perhaps forestalling any push for fundamental reform. But, over time, these “cleansing” efforts tend to lose luster and need renewal.

You may have read last month about the passing of Richard Knerr, co-inventor of one of the greatest American fads of all time, the Hula-Hoop. Knerr learned it was a great toy, but a lousy business product because it lasted forever. His more successful follow-up, the Frisbee, was prone to getting lost or chewed on, and thus needed replacing or updating from time to time. So, too, is our tax code. With annual changes to it and additions piled it, it clearly is not meant to last forever.

We should begin the process of renewing the code, perhaps starting with the bold suggestions by Chairman Rangel. We have long had a progressive income tax, both before and after the 1986 reform. I believe it is a good system, albeit one worthy of an update.

Rep. Richard Neal (D-Mass.) is chairman of the Ways and Means Subcommittee on Select Revenue Measures.