April 15 May Get Less Taxing if Debt Cutters Have Their Way
I should be doing my taxes, but instead I’m writing this column. When I’m done with that, maybe I’ll do some ironing. I’d do anything to postpone tax filing. It’s just so darn complicated!
Ironically, perhaps, I’m something of a tax expert. I was a top tax official in President Clinton’s Treasury Department and cofounded the Tax Policy Center in Washington. Because of that experience, I know that my misery is completely avoidable.
At Treasury, every time the famously empathic President Clinton felt someone’s pain, staff proposed a new tax credit or deduction to alleviate it. Never mind that the argument for government intervention was often dubious and the case for doing it through the tax code even weaker, politicians like to give away goodies. But they make things really complicated.
It’s a bipartisan problem. Politicians of all stripes can’t resist creating tax subsidies to reward and “incentivize” behavior. To keep people from exploiting those rewards and incentives to pay embarrassingly little tax, however, the code takes back some of the tax breaks with a variety of phase-outs (meaning you lose the goodies as your income grows). Thus, tax complexity multiplies like a virus.
The poster child for mind-numbing complexity is the alternative minimum tax. It makes you figure your tax under a completely different set of rules and rate schedule and, if that amount is higher than your regular tax, pay the difference as AMT. Originally intended to make millionaires pay at least a little tax, it has mutated into the bane of the middle class. It hits New Yorkers especially hard because deductions for our super-sized state and local taxes are not allowed under the AMT.
The tax code also includes baffling multiple choice tests. For example, taxpayers must choose among three subsidies for college tuition: the lifetime learning tax credit, the American opportunity tax credit, and the deduction for higher education expenses. (The deduction was championed by our own Senator Schumer, who thought that two tuition tax breaks were not enough for New Yorkers.) If you can figure out which one is right for you, you probably already have a Ph.D.
But before you jump out the window (or resort to ironing), there’s hope. Efforts currently underway to tame our ballooning national debt all include a healthy dose of tax reform. The president himself made an eloquent call for reform on Wednesday: “I’m calling on Congress to reform our individual tax code so that it is fair and simple – so that the amount of taxes you pay isn’t determined by what kind of accountant you can afford.”
The silver lining behind our looming debt catastrophe is that many of the tax subsidies that complicate April also cost the Treasury a lot of money. Eliminating them could be a twofer—simplifying tax compliance and reducing the debt. All but one of the major debt reduction proposals would slash tax subsidies and use the savings to pay for lower tax rates and smaller deficits. Besides for simplifying, this also makes the economy work better because a tax system with fewer loopholes and lower tax rates is much less conducive to inefficient tax shelters.
The exception is the recent proposal by House Budget Committee Chairman Paul Ryan. Like the president’s plan, it’s completely noncommittal on which tax subsidies will fall under the axe. But it’s quite clear that all the savings—$3 trillion according to the Tax Policy Center—would be spent on lower tax rates for individuals and corporations. In another time, this kind of “revenue neutral” reform might have made sense, but I think Congressman Ryan underestimates the challenge in closing our giant debt hole. He is one of very few people who think that it can, or should, be filled by spending cuts alone.
The best model, in my view, is the plan proposed by the Domenici-Rivlin task force, on which I served. The plan (details at bipartisanpolicy.org) would raise revenue, cut tax rates, help pay down the debt, and simplify the tax system so much that half of Americans would no longer have to file tax returns. That is change we could all believe in.
The debt is an urgent problem and I cheer on the would-be reformers. Yeah, we’ll probably end up paying more taxes down the road, but with a smaller mountain of debt to pay back, our kids will pay less. And maybe our kids won’t be pulling out their hair on future April 15s trying to decode our Rubik’s Cube tax system.
Len Burman is an affiliated scholar at the Urban Institute and the Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School of Syracuse University.
[This was originally published in the Syracuse Post-Standard.]