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

By :: February 21st, 2013

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.

10Comments

  1. Michael Bindner  ::  8:10 pm on February 21st, 2013:

    I think that this is likely, as to do that tax simplification I propose would take an election with a 9-9-9 like proposal with a bit more heft than something proposed in SimCity. Small, revenue raising proposals could become low hanging fruit, and picking it and acknowledging that the ATRA closed the budget gap could be enough reduction to delay and ultimately cancel the sequester.

  2. Tax Roundup, 2/22/2013: Why California refugees might not choose Iowa. And: to C or not to C? « Roth & Company, P.C  ::  9:29 am on February 22nd, 2013:

    […] Gleckman, Congress May Not Rewrite the Tax Code in 2013, But It Could Make It Simpler (TaxVox).  If you can’t do everything, you might still do […]

  3. Kathy Ruffing  ::  12:27 am on February 24th, 2013:

    I must protest the gratuitous jab at pink-tiled bathrooms! They’re a wonderfully sturdy and nostalgic piece of Americana, dating from about the same era as the Internal Revenue Code of 1954, and deserve preservation. See http://savethepinkbathrooms.com/. I’m glad your hypothetical bickering couple, who moved into the house in 1986, at least had the sense to leave the bathroom untouched.

  4. Robert  ::  10:49 am on March 6th, 2013:

    Here’s some low-hanging fruit for educational tax reform (please sign this White House petition): http://wh.gov/vmvu

    End the 10% IRS penalty for student loan payments!

    Student loan payments should NOT be subject to the 10% IRS penalty for early withdrawal of (traditional) IRA funds.

    Currently, early IRA withdrawals are NOT subject to the 10% penalty if those withdrawals are used for direct tuition payments. But if a student isn’t tax-savvy, and waits until after graduation to withdraw IRA funds to pay down her student loans, those withdrawals ARE subject to the 10% penalty. Don’t punish students for not being tax-savvy.

    Traditional IRA withdrawals used exclusively to pay student loans should qualify for the Education Exception to the Additional Tax on Early IRA Distributions, and should NOT be subject to the 10% IRS penalty on early IRA distributions. Please reference Pages 56-57 of the following IRS document for context: http://www.irs.gov/pub/irs-pdf/p970.pdf

    See also “When Can You Withdraw Funds” at http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230701
    and
    “Exceptions” http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230899

  5. Simpler Tax Code Good, But No Tax Prep Better | Poverty & Policy  ::  7:01 am on April 8th, 2013:

    […] It could, however, make the tax code “simpler and smarter,” as Howard Gleckman at the Tax Policy Center suggests. […]

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