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Anyone who's ever filled out a 1040 form knows this: The American tax system is complicated. The IRS says the average taxpayer devotes more than 21 hours a year to the task.
All this week, we've been reporting on the debate over whether to extend some or all of the tax cuts enacted during the Bush administration. But today, we're going to think even bigger, about whether or not, as some economists say, the tax system needs a thorough housecleaning.
NPR's Scott Horsley reports.
SCOTT HORSLEY: Its been almost a quarter century since the last big rewrite of the tax code. Republican President Ronald Reagan got some key help in that 1986 effort from former Democratic Senator Bill Bradley.
Former Senator BILL BRADLEY (Democratic, New Jersey): If you're going to do a deal on a bipartisan basis, you have to have something in the deal that Democrats want. In '86 that was getting rid of loopholes. And you have to have something that Republicans want, which in '86 was lowering the top tax rate.
HORSLEY: Even now, many economists on the left and the right say that's the best way to design a tax system - with few loopholes and relatively low tax rates. But the streamlined code that Bradley and his colleagues cooked up in 1986 didn't last. More than 15,000 changes have been made to the tax code since then. And the instruction book for the 1040 form has more than tripled in length.
When President Obama asked a panel of experts to look for ways to simplify the tax system, one member likened the current code to an untended garden.
Another panelist, Berkeley Professor Laura Tyson, says thats no accident.
Professor LAURA TYSON (Economics Department, University of California, Berkeley): The problem is the garden is growing nice flowers, so it's not a matter of weeds. These things were planted.
(Soundbite of laughter)
HORSLEY: Tyson says lawmakers are constantly adding new wrinkles to the tax code that have nothing to do with raising revenue, but are all about achieving some other objective, such as encouraging home ownership or saving for college.
William Gale of the Tax Policy Center says it's easier for lawmakers to win approval of a program if its couched as a tax incentive, rather than direct government spending. Even though, he says, the effect on government coffers is identical.
Dr. WILLIAM GALE (Co-Director, Urban-Brookings, Tax Policy Center): Take the mortgage interest deduction. You could structure that as a government spending program. And by the way, it would look ridiculously stupid if you did, because we'd be giving huge amounts of government spending to the highest-income households with the biggest houses that are leveraged to the max, right? And if you look at that as a spending option, you'd say why would we ever do that?
HORSLEY: Stripping away these tax incentives would not be easy, since the people who claim the deductions and credits tend to get pretty attached to them. But economists generally agree eliminating these carve-outs would make taxes simpler, and it allow the government to raise more money without having to impose higher income tax rates. Thats where the consensus ends.
A former economic adviser to President Bush, Glenn Hubbard, argues in his book "Seeds of Destruction" that besides broadening the income tax base, the government should encourage savings and investment by eliminating taxes on dividends and capital gains.
Professor GLENN HUBBARD (Author, "Seeds of Destruction"): You can raise the same amount of money. You can do it in at least as fair a way as we're presently doing and you can do so in a way that actually encourages economic growth.
HORSLEY: Lawmakers might also consider supplementing the income tax with a consumption tax or tax on energy. Former Senator Bradley argues that by coupling higher gasoline taxes with higher fuel economy, the government could raise a lot of money without necessarily making driving more expensive.
Former Sen. BRADLEY: Let's say you had a dollar gasoline tax, you phase it in over 10 years. You could have a situation in five years where people would have more fuel-efficient cars and they wouldn't be spending more money than theyre now spending on gasoline, even though the gasoline price had gone up.
HORSLEY: None of these proposals would please everyone. Taxes rarely do. But over the long run, the government is unlikely to raise the revenue it needs to bring the deficit under control simply by raising income taxes on the very rich, as President Obama has proposed. The president seemed to acknowledge as much when he instructed his commission, looking for ways to address the deficit, not to take any options off the table.
The Tax Policy Center's Gale says cutting the deficit and fixing the tax code is going to require some audacity.
Dr. GALE: There is no solution out there right now that anyone would call politically feasible, and that is not a criticism of the solutions. That is a criticism of the mind-set of the public and politicians, because eventually we are going to have to do some painful things. There is no other way out of this.
HORSLEY: A wise tax policy could make those changes less painful. And as a side benefit, potentially ease the process of filling out one's tax form.
Scott Horsley, NPR News, Washington.
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