Tax Extenders and Tax Reform

By :: February 2nd, 2012

On Tuesday, I testified before the Senate Finance Committee at a hearing titled “Extenders and Tax Reform: Seeking Long-Term Solutions.” I was already depressed about the state of our tax system before I started preparing. As I drafted my testimony, I became distraught.

Our tax system is a mess and unless we send a clear signal to Congress to do something about it, it’s just going to get messier and messier. As Bruce Bartlett writes in his book, The Benefit and The Burden, the tax system is like a garden. It gets overgrown and chaotic unless you regularly clean it. Well, we’ve got an eyesore now and need to bring in a bulldozer.

Here’s what leaves me distraught.

Sixty temporary tax provisions expired at the end of 2011. Congress enacted each with an expiration date and has subsequently extended almost every one. Most of these “temporary” provisions—nicknamed “extenders”—have been repeatedly extended.

Congress created the vast majority of extenders to provide special treatment for a particular activity or investment. They vary widely from special depreciation rules for NASCAR race tracks to subsidies for commuting. Unlike other tax provisions that provide targeted tax benefits, however, extenders have a limited shelf life. Much like the dairy section of the grocery store, our tax code is now littered with expiration dates.

For many taxpayers whom these extenders affect, the recurring ritual of enduring a tax code death watch only to be saved by last minute clemency --- or, in cases like this year, resurrection --- creates tremendous volatility and uncertainty. It creates a perception that our tax code is unfair and reinforces the view that the current legislative process is dysfunctional and our elected representatives are unwilling or unable to choose among competing priorities.

It’s time to take a stand on extenders and on tax reform. I recommended at the hearing that the extenders be considered within the context of fundamental tax reform.

We seem to have forgotten that the fundamental purpose of our tax system is to raise revenue to fund government. The current system is riddled with tax provisions that favor one activity over another or provide targeted tax benefits to a limited number of taxpayers. Whether permanent or temporary, these provisions create complexity, impose enormous compliance costs, breed perceptions of unfairness, create opportunities to manipulate rules to avoid tax, and lead to an inefficient use of our economic resources. The tax code has become less stable, increasingly unpredictable, and more and more difficult for taxpayers to understand.

A reform that broadens the base would not only raise revenue but would also simplify the system, increase transparency, make it less distortive by reducing tax-induced biases towards certain activity, and improve the fairness of the system. Broadening the base requires deciding which special tax provisions to keep in the code and how best to design them.

Our current fiscal situation demands that we refrain from our habit of kicking the can down the road on tax reform and face the challenges ahead. It’s time to bring in that bulldozer.

8Comments

  1. Michael Bindner  ::  1:27 pm on February 2nd, 2012:

    The only way to really end many of these is to combine the taxation of both labor and profit into taxation of consumption, with visible elements in a VAT and invisible elements in a VAT-like Net Business Receipts Tax, which is invisible because it has offsets for such items as a child tax credit or prebate, health insurance for workers and even health insurance or care for retirees. This can be combined with either a surtax on the employer tax for distributions to higher income employees or shareholders as suggested by Lawrence B. Lindsey (which creates privacy concerns or underpayment/overpayment issues) or a simplifed income tax with a high standard deduction that only rich people file.

  2. Tax Extenders and Tax Reform | Tax Information  ::  1:27 pm on February 2nd, 2012:

    […] the original here:  Tax Extenders and Tax Reform Posted in News Tags: bruce-bartlett, budget, challenges, code, congress, deficit reduction, […]

  3. AMTbuff  ::  2:08 pm on February 3rd, 2012:

    Our income tax has become permanently temporary. Our spending promises are temporarily permanent. It’s a perfect balance of two unsustainables.

    Our current fiscal situation demands that we refrain from our habit of kicking the can down the road on tax reform

    Tax reform is pointless or worse until we get expenditure reform, namely explicit default on promised benefits for the non-poor. You bail out a boat after you repair the hole in the hull, not before.

    Until long-term commitments are scaled back it makes perfect sense to balance temporarily permanent spending policies with permanently temporary tax policy.

  4. MMTsays  ::  3:53 pm on February 3rd, 2012:

    “We seem to have forgotten that the fundamental purpose of our tax system is to raise revenue to fund government.”

    No. Not so.

    “Taxes function to regulate aggregate demand, and not to raise revenue per se.” – Warren Mosler, author of “The 7 Deadly Innocent Frauds of Economic Policy”.

  5. hb  ::  5:59 pm on February 3rd, 2012:

    The tax code is the way it is because legislators grant special provisions to lobbyists in return for campaign donations. Giving provisions an expiration date and then renewing them each year ensures those donations continue to flow in. There is no question the tax code should be simplified. The real question is, how is it possible to do so when both legislators and lobbyists gain significant benefits from a complicated tax code?

  6. BobN  ::  6:09 pm on February 4th, 2012:

    The complications of the tax code that people complain about and want fixed are the ones they run into themselves in the course of filing a fairly routine return. They don’t like the math, the weird language, etc. They hate that it’s so easy to make a mistake.

    That there are obscure, arcane provisions that benefit a tiny number of companies or individuals is a terrible thing, but eliminating them addresses an entirely different problem with our tax system and will do little to change things for those who don’t like the “complexity”. I personally am rather fond of the one or two complexities I’ve recently become eligible for and would really hate their disappearance…

  7. TomK  ::  10:44 pm on February 5th, 2012:

    the tax code is in shambles because we have become a me,me,me,me nation.

  8. Tyler  ::  11:14 am on February 6th, 2012:

    When you say “broaden the base,” do you mean raise taxes on the poor?