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What Will It Take To Rewrite The U.S. Tax Code?

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What Will It Take To Rewrite The U.S. Tax Code?

Politics

What Will It Take To Rewrite The U.S. Tax Code?

What Will It Take To Rewrite The U.S. Tax Code?

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William Gale, a senior fellow in economic studies at the Brookings Institution and co-director of the Urban-Brookings Tax Policy Center, talks to NPR's Robert Siegel about what it will take to rewrite the tax code in the U.S.

ROBERT SIEGEL, host:

So what would it actually take to change the tax code? Joining us to talk about that is William Gale, who is a senior fellow at the Brookings Institution and co-director of the Tax Policy Center there.

Welcome.

Mr. WILLIAM GALE (Co-Director, Tax Policy Center, Brookings Institution): Hi.

SIEGEL: As we just heard in Scott Horsley's story, in this case, special interests means us. What does that say about the prospects for reforming the tax code?

Mr. GALE: Any hope for reforming the tax code is going to be very difficult. We're going to have to move step by step. Every step is going to be hard. The reason is that it creates winners and losers, and the losers will object, while the winners happily take their gains. In the past, we paid off the losers, but we can't afford to do that right now.

So tax reform is going to be difficult. Even aside from the politics of the House and the Senate, simply reforming the system in a way that doesn't lose revenue will turn out to be a difficult task.

SIEGEL: You're saying it's a tough piece of accounting, of economics, even before you get to the politics of the matter.

Mr. GALE: Yes, even if you just sat down 10 experts in the room and said, reform the tax system, they would largely agree on the general way to reform the system. But when it came down to particular groups, they might have different opinions.

SIEGEL: There's this question of, should you have a system that simply has some flat tax rates and that's what you pay, or should you have all of these tax expenditures that Scott Horsley was reporting on just now.

I added up, according to the congressional Joint Committee on Taxation, what are the - roughly the cost we would pay over the years from 2010 to 2014 on encouraging health care - people being insured, either publicly or privately -homeownership through deducting mortgage interest or property taxes, and secure retirement - how much we exclude in that regard.

That's huge. I mean, these three positive values that we have come up to, over five years, two and a half trillion dollars or more.

Mr. GALE: Yes, there's enormous money in tax expenditures and in those subsidies. And the way to think about that is tax expenditures are really spending that's in the tax code. And so just as spending items like Social Security and Medicare are central to what people think the government does, spending items like the mortgage interest deduction, the tax treatment of health insurance, the deductibility of charitable contributions are also central to the notion of the way many Americans think government ought to interact.

All of those assumptions are going to have to be reexamined for the simple reason that we cannot afford the sum total of all the subsidies we have given.

SIEGEL: Is there a tax expenditure, tax loophole out there that would have, say, the mythic stature that the oil depletion allowance used to have decades ago - some special interest that's making hundreds of billions of dollars off favorable treatment?

Mr. GALE: I think we had our heyday of targeted tax expenditures in the late '70s and the early '80s in the chinchilla farms and stuff like that, largely got wiped out in 1986. That's actually bad news 'cause it means the tax expenditures that are left now are really sort of the core social goals that government often pursues.

Nevertheless, those expenditures are regressive. That is, they largely help high-income households at the expense of low-income households. And it may well be that we need to rethink the social contract not just on the spending side but on the tax side too.

SIEGEL: Do you think there's some amount of federal income tax for those in the higher brackets that you could almost get for free out of the public if it meant that you didn't have to retain a tax preparer and pay a couple of thousand dollars to have your taxes done by somebody else?

Mr. GALE: Well, you know, it's interesting. The one thing that people complain about consistently is that the tax system is too complicated. But if you ask people, how much more would you pay in taxes in order to have your taxes be simple? The answer is: Not very much. That sort of tells you why our taxes are complicated. Everybody wants their own particular subsidy. No one is willing to give it up in exchange for a simpler tax system.

SIEGEL: Bill Gale, thanks for talking with us.

Mr. GALE: Thank you.

SIEGEL: That's William Gale, who is co-director of the Tax Policy Center at the Brookings Institution in Washington, D.C.

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