Beyond The Tax Deal: Targeting The Code Itself

Just as President Obama put the final signature on the tax deal passed by Congress this week, he raised an issue that has dogged his predecessors in recent years: how to reform the tax code itself.

Back in the 1990s, there were fewer than a dozen short-term tax provisions — including credits for certain business investments, child credits, education deductions, etc. — that had to be re-approved by Congress every year or so.

By this year, that number had topped 140.

And that has to change, according to two Washington veterans — Mortimer Caplin, who ran the Internal Revenue Service under John F. Kennedy, and David Stockman, budget director for Ronald Reagan.

'Barnacles And Crevices'

Caplin is 94 years old — just three years younger than the IRS itself. And he describes today's tax code as "full of barnacles and crevices and windows and holes. It needs a major reform and restructuring."

Back in 1960, Caplin was tasked with retooling a tax system that had rates up to 91 percent for the highest earners. Kennedy slashed that top rate to 70 percent; under the deal President Obama signed, the top rate will stay at 35 percent for the next two years.

Economists and politicians on both sides of the aisle — including the president — believe that those rates should be reduced even more. The key is cutting off those barnacles and filling in the crevices.

Beyond Reform: New Taxes?

Stockman, who ran the Office of Management and Budget under Reagan, says that won't be enough, though.

"We are going to need another source in this country, not just the income tax," Stockman says. "If we try to obtain from the income tax the higher revenue we need to get our fiscal house in order," lobbyists and interest groups are going to push for more credits and deductions. As a result, the system would be more complicated and benefit those narrow interest groups.

The only way to lower income tax rates, he says, is to eliminate tax breaks for mortgage interest and education expenses, among other things. In addition, Stockman says "we need some kind of consumption tax, and frankly we should put a transaction tax on Wall Street as well." These, he argues, wouldn't hurt the economy and would provide the type of revenues necessary.

"The general taxpayer ... doesn't have time to lobby for a broad tax base and reasonable rates," Stockman says. Narrow interests, on the other hand, can lobby for obscure, narrowly focused language in the tax code that saves them a lot of money.

He calls it an "asymmetry of democracy which there is no clean answer to, but that's the reason tax reform is tough."

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