Congress May Not Rewrite the Tax Code in 2013, But It Could Make It Simpler

As regular readers of Tax Vox know, I don’t believe there is much chance President Obama and Congress will agree on individual broad-based tax reform in 2013. Without a deal on how much this new tax system should raise, talking about a big rewrite is futile. However, Obama and Congress still have an opportunity to do something very useful: Clean up the law so it is simpler and smarter.

Making the code less complicated and more efficient may not achieve the rate-cutting, base-broadening reform many want. And it surely is not the cosmic shift to a consumption tax favored by others. But it can have important consequences for real people.

Until now, Democrats and Republicans have been like a couple that has been living in the same house since 1986. For decades, they’ve been having the same argument: She wants to put on a big addition. He wants to move. While they’ve bickered, the house has deteriorated.

But they have an alternative: Call a cease fire and upgrade what they have: Put in energy-efficient appliances, update that pink-tiled bathroom, and give the place a fresh paintjob. Neither spouse may be  fully satisfied, but they’ve made the house a lot more pleasant to live in.     

Policymakers could do the same with the tax code. My Tax Policy Center colleague Eric Toder has been arguing for exactly that step since the fiscal cliff debacle last year. And at a hearing last week, House Ways & Means Committee chairman Dave Camp (R-MI) seemed to be making the same point:  “We want to ensure that whichever policies we ultimately decide to pursue are crafted in a way that makes the tax code simpler, fairer, and easier to comply with.

Camp, in fact, has already begun this process. He has proposed a substantial simplification of taxation of financial products such as derivatives. And he has assigned committee Democrats and Republicans to task forces that will review specific areas of the code. Given the vast policy gulf between the parties, lawmakers may not agree on fundamental changes, but they can at least make existing provisions work better.

The idea is hardly new. More than a decade ago, for example, President George W. Bush proposed consolidating the dozens of tax advantaged savings accounts that litter the code. It was a good idea then. It is an even better one now.

Why? Because behavioral research shows that when faced with multiple choices people tend to do…nothing, thus defeating the whole purpose of these saving incentives.

Whether you are a Democrat or a Republican, if your goal is to use the tax law to encourage people to save, why wouldn’t you want the subsidies to work as efficiently as possible? And that means skinnying down the number of tax-advantaged savings plans now baffling taxpayers.  

Of course, not everyone will embrace simplification. For instance, different financial firms have found their own profitable niches in each of today’s smorgasbord of investment vehicles (some specialize in IRAs, others focus on employer-based 401(k)s, and still others manage non-profit 403(b)s). Their lobbyists will battle to keep the mess that makes them rich.

Still, there are entire bushels of low-hanging fruit here, many identified by my TPC colleagues. Elaine Maag has written about ways to make refundable credits for low-income households more efficient. Kim Rueben has worked out ways to improve tax subsidies for higher education. Gene Steuerle has helped developed ways to make the tax preference for charitable giving more efficient.  

This stuff isn’t easy, and in some cases smarter isn’t simpler. But Congress can get a lot done without getting into theological battles over whether we are taxed too much or not enough. Pols like to say government needs to learn to spend money smarter, especially as we face an era of fiscal constraint. Well, that’s true whether we are spending it through direct appropriations or though the tax code.