How to simplify the tax code in 2013
As regular readers of听Tax Vox听know, I don鈥檛 believe there is听听President Obama and Congress will agree on individual broad-based tax reform in 2013. Without a deal听on how much this new tax system should raise, talking about a听big rewrite听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听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鈥檝e been having the same argument: She wants to put on a big addition. He wants to move. While they鈥檝e 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听听fully satisfied, but they鈥檝e made the house a lot more pleasant to live in. 听 听 听听
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:听 鈥淲e 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听听of taxation of financial products such as听听And he has assigned committee Democrats and Republicans to听听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鈥othing, 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鈥檛 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. 听
Of course, not everyone will embrace simplification. For instance, different financial firms have found their own profitable niches in each of today鈥檚 smorgasbord of听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听听more efficient. Kim Rueben has worked out ways to improve听. Gene Steuerle has helped developed ways to make the听听more efficient. 听
This stuff isn鈥檛 easy, and in some cases smarter isn鈥檛 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鈥檚 true whether we are spending it through direct appropriations or though the tax code.
