Recently, Senator Jeff Bingaman (D-NM) and Senator Charles Grassley (R-IA) introduced bills that would discourage private investment in toll roads through public-private partnerships (so-called P3s). Notable examples of this type of investment include the long-term concessions for the Chicago Skyway and the Indiana Toll Road that were granted to private toll road operator-investors.

The Transportation Access for All Americans Act (S. 885) would curtail tax benefits for "applicable leased highway property" by extending the depreciation period from 15 years to 45 years. In addition, the amortization period for intangibles (such as goodwill or franchise rights) would be increased from 15 years to the entire term of the lease. These provisions would dramatically lower the after-tax returns on investment relative to other types of road, such as logging roads or private rights of way, and similar investment activity. The bill also would deny private activity bond financing to any projects. A companion bill, the Transportation Equity for All Americans Act (S. 844), would create significant disincentives for States to enter into private investment arrangements by curbing the use of federal highway funds for these roads.

Putting aside the merits of P3 deals, the proposals by Senators Bingaman and Grassley represent a disturbing trend of Congress micro-managing the cost recovery system. Increasingly, lawmakers are using depreciation schedules to reward activities they like and punish those they don’t. This sort of tinkering adds complexity to the code and drags the cost recovery system further away from any connection to economic useful life—which, after all, was supposed to be the point.

Under current law, taxpayers may take depreciation deductions for new investments under the modified accelerated cost recovery system (MACRS). Each asset is assigned a recovery period (the number of years over which depreciation allowances are spread), a recovery method (how depreciation allowances are allocated over the recovery period), and a convention to determine when the asset was placed in service. The recovery period is based upon the class life of the property as originally established by the IRS in 1962. Remarkably, recovery periods have remained largely unchanged since 1986 and most class lives date back to 1962 or earlier.

In 1988, Congress revoked the IRS’s authority to assign class lives. Since then, entire new technologies have been created, such as mobile phones, automated manufacturing systems, and laser printers. Based in part on concerns that the depreciation system was in need of reform, Congress directed Treasury to study the system in 2000. The report concluded that the system was dated and included an evaluation of options for either overhauling or modifying the system. Instead moving ahead with reform or even restoring IRS authority to update class life assignments, Congress has instead chosen to micro-manage the system. Here are just a few examples:


The new focus on legislating individual cost recovery periods results in class lives with ambiguous meaning and leads to administrative problems and taxpayer controversies. Congressional meddling increases economic distortions and moves us further from a system that rationally adds new assets and updates existing categories of investments. These problems will multiply if the trend continues. President Bush’s tax reform panel proposed overhauling and simplifying the current depreciation system. Let’s hope the Volker panel will look at depreciation reform as well. Cost recovery isn’t very sexy, but no tax reform effort should ignore it.

The landmark Tax Reform Act of 1986 would never have happened without Jack Kemp. The voluble supply-sider, who died yesterday at 73, helped make tax reform, and not just tax cuts, acceptable to Republicans. As early as 1977, then-congressman Kemp and Senator Bill Roth (R-DE) pushed a bill that would have reduced tax rates across-the-board. In 1983, Kemp bucked many in his party by making back-channel overtures to Democratic tax reformer Senator Bill Bradley (D-N.J.)—an effort recounted in Jeff Birnbaum’s and Alan Murray’s Showdown at Gucci Gulch. Bradley and Kemp shared a key political insight: If you can get rates low enough, you will ease the pressure to create, and protect, tax loopholes.    more »

President Obama announced yesterday that he has asked former Federal Reserve Chairman Paul Volcker to head a new tax reform panel that will make recommendations by December 4th. This is great news. The current tax system is a complicated mess and can’t produce the revenues we will need in the coming years. But there is no reason for Volcker to reinvent the wheel. His panel could start by looking at the work of a bipartisan tax reform panel established by President Bush in 2005. I may be biased, since I served as the staff’s chief economist, but I think we designed a pretty good blueprint.    more »

Is it time for the U.S. to consider a Value Added Tax? More and more tax experts think so. But the politics isn’t yet getting easier. One problem: While more specialists are joining the VAT fan club, they can’t agree on what to do with the money. TPC’s Len Burman has proposed a VAT to supplement the income tax and pay for health care. Michael Graetz, once a top tax aide to the senior George Bush, would use one to get most Americans off the income tax. At the TPC/Tax Analysts tax reform conference on Dec. 5, Pam Olson, who was a top tax aide to the today’s President Bush, endorsed the levy as a way to buy down corporate tax rates. Once the tab comes in for the trillions of dollars Washington is spending to stimulate the economy and bail out the financial markets, I am certain others will propose a VAT simply to help pay the bills.    more »

I turned in my PhD dissertation just in time. I can’t believe I’m going to be a doctor of public finance. My paper: An Alternative Tax System in the McCain Administration. It is a detailed description and macroeconomic analysis of John McCain’s plan to give taxpayers a choice of paying under the current system or through a much simpler and more efficient option.    more »

John Endean raised an intriguing idea the other day in response to my blog on whether business executives would be willing to give up targeted tax breaks in return for a lower corporate rate, as John McCain has suggested.    more »

I'll be moderating what should be an interesting discussion on fundamental tax reform at the New America Foundation on Tuesday. Other panelists will be New America's Maya MacGuineas and Michael Lind, and Yale University's Mike Graetz, who has designed a new Value Added Tax. If you’d like to join us, sign up at NAF's website.

Johnny, we hardly new ye.

John McCain’s ambitious plan to reform corporate taxes is disappearing faster than the Washington National's chances to win the national league pennant. What once had the makings of a provocative and potentially beneficial idea is morphing into a gimmicky mess.

Earlier his spring, McCain was talking about allowing companies to expense all their capital investments in the year they are made. This would eliminate many of the timing-related issues that make corporate taxes so complicated. It might even have become the first step towards replacing the income tax with a cash-flow levy. In such a system—a version of a Value Added Tax—companies would subtract their costs of goods from revenues and pay tax on the difference.

Back then, McCain had not yet answered one big question: What would happen to the tax deduction companies take for their interest payments? In any sensible expensing scheme, interest could no longer be tax deductible. If it were, businesses would become huge tax shelters.

Now that he’s started to answer this and other questions, his idea is getting worse. In his revised plan, which staffers have described to TPC, expensing would be limited only to short-lived property—equipment like cars and computers--now depreciated over five years or less. The proposal would be temporary, and would expire after five years. Interest payments would be taxable, but only if used to finance specific short-lived investments.

Yuck. Speeding up a deduction that you could take in a couple of years anyway is not much of a tax break. Making the proposal temporary just creates messy new timing issues—and would threaten to become yet another tax “extender” that is part of the annual Washington theater. And tying the interest deduction to the purchase of specific property will surely create endless opportunities to game the system. This will bring joy to the hearts of investment bankers and tax lawyers, but not to the rest of us.

The best that can be said about McCain's latest version is that perhaps it is an effort to shove the tip of the camel’s nose under the proverbial tent: Start with this and get more ambitious later. But that's a reach. Don’t get me wrong, McCain’s initial proposal had its problems, but it was intriguing, potentially far-reaching, and worthy of debate in a presidential campaign. This version will fall into the dust-heap of forgotten ideas. There was a brief moment when I thought we were going to have a serious tax reform debate in this campaign. I should have known better.

For another take on my debate with George Yin on whether temporary tax breaks are a good idea George) or not (me), take a look at economistmom, the new blog by former House Ways & Means Committee chief economist Diane Lim Rogers. She’s got a great anecdote about a conversation with a committee member during a late night markup of an extender bill.

Kudos to Rep. Paul Ryan (R-WI), the senior Republican on the House Budget Committee, for proposing an ambitious plan aimed at bringing government spending under control over the next 75 years. Actually, Ryan would do even more than that. He’d also restructure the tax code, Social Security, Medicare, and Medicaid.    more »

While most observers are focused on John McCain’s proposed summer gas tax holiday, they have missed a much bigger idea from GOP’s likely presidential nominee: A massive tax reform—but one that, at least as it stands now, would be a huge windfall for business.   more »

To celebrate April 15, TPC director Len Burman argued yesterday on TaxVox that today’s income tax “is not all bad” and that “we could do a lot worse.” Well, it may not be all bad, but it is pretty awful. And while we could do worse, we could also do a lot better.   more »

Like most Americans, I hate preparing my income tax return. And, as a tax policy expert, I know that our current tax system is deeply flawed. But it's not all bad. It raises a lot of revenue ($1.1 trillion in 2007) and, like it or not, we have to pay for government. Income taxes are also progressive, raising the lion's share from those most able to pay, and little or nothing from those at the bottom. Sure, we could and should make it simpler and fairer, but we could also do a lot worse.

The financial burden of the income tax on most people is pretty bearable. Most taxpayers pay more in payroll (FICA) taxes than in income taxes. For example, the median income of married couples in 2007 was about $74,000. (That is, half of couples earned more and half less.) Their average income tax bill was $3,400, or less than five percent of income. The median-income single taxpayer earned $22,500) and paid about $610, or three percent.

The income tax also helps millions of working families at the bottom. The earned income tax credit (EITC) augments the meager wages of low earners and encourages them to work. Indeed, the EITC lifts millions of children out of poverty.

People with high incomes paid a lot more. The top 40 percent pay most of the income tax. The top 10 percent pays 72 percent. That seems like a lot, but they earn nearly half of all income. Their income tax amounts to about 16 percent of income.

They should pay even more—their incomes have exploded while middle-income households have struggled to get ahead, and they have gotten huge tax cuts since 2001. But, even after the tax cuts, the income tax is highly progressive.

That said, there are huge flaws in the income tax.  Some high-income people pay peanuts in tax because of gaping loopholes. Meanwhile, middle- and even low-income people are so daunted by the unnecessary complexity that most pay professional preparers to fill out their tax returns.

The income tax needs fixing and proposals for doing just that are abundant. But there are also proposals—well funded by millionaires who think they're over-taxed—that would jettison the income tax in favor of a supposedly simpler system.

The so-called “Fair Tax,” famously embraced by Governor Huckabee in his run for the White House, would replace the income tax with a national sales tax. Its proponents argue that just about everyone would pay lower taxes under this system, apparently assuming that most Americans are not bright enough to figure out that this means that the tax would not raise anywhere near enough money to finance the government. In fact, at rates high enough to pay for the government—at least 34 percent, according to President Bush's tax reform panel—it would represent a huge tax increase on the middle class and (surprise) a huge tax cut for millionaires (who spend only a fraction of their incomes).

The flat tax, Steve Forbes's crusade, would similarly bestow massive tax cuts on the wealthy. Fred Thompson proposed allowing people the option of paying tax under a simpler alternative tax system. People would only make that choice if it meant lower taxes, and the people who'd get the biggest tax cuts would be the millionaires. This bit of fiscal magic would add $6 trillion to our burgeoning national debt over the next 10 years.

Senator McCain's proposal, which his campaign admits is a first step toward a consumption tax, would do nearly as much damage to fiscal finances as Senator Thompson's tax giveaway.

Ironically, the Democratic candidates would unwittingly provide ammunition for the income tax bashers by adding a raft of new credits and deductions. Those breaks may make great sound bites on the campaign trail, but they'd make the income tax more complicated and contribute to the perception that it is unfair.

The solution is not to ditch the income tax, but to fix it. Rein in the propensity of politicians of both parties to use it to grant favors to particular constituencies. And make sure it raises enough revenue to pay our bills so we don't bequeath bigger tax headaches to our children.

While the Presidential candidates are campaigning on grandiose and often radical reforms to the current tax system, they are missing out on a simple commonsense reform that would make tax filing easier for millions of Americans.    more »

A News Years Eve, 1965, Time magazine article quoted iconic free-market economist Milton Friedman as saying, "We are all Keynesians now." Friedman later explained that the quote was taken out of context. He meant that even though the language of John Maynard Keynes—famous for recommending fiscal policy as a tool to manage the economy—had pervaded popular consciousness, most people had no idea what this meant.   more »