If the number of congressional hearings on tax reform this year is an indication of the potential for passage, it seems possible that something may actually be in the works.
In addition to a number of House committee and subcommittee hearings, the Senate Budget Committee held a hearing last week that focused on ways to support broad-based economic growth and fiscal responsibility through tax reform.
Senator Patty Murray, D-Wash., chairman of the committee, said that if tax reform were done “the right way—meaning the fair way—tax reform has the potential to make our tax system simpler and more efficient, to ensure that those who invest here in the U.S. and play by the rules see the benefit, and to encourage the kind of long-term, broad based economic growth that we saw back in the 1990s.”
Hamilton Project policy director and Brookings senior fellow Adam Looney told the committee that tradeoffs would be necessary to enact broad tax reform, noting that it is difficult to lower tax rates through tax reform while devoting revenue to deficit reduction and maintaining progressivity. The tradeoffs are necessitated because of the difficulty of improving, simultaneously, on the three competing goals of efficiency, revenues and equity.
“Today’s long-term budget outlook means that we’re likely to need higher tax revenues in the future,” he told the committee. “And rising inequality means that changes in policy will be increasingly scrutinized for how they affect the progressivity of the tax schedule. But a tax reform that devotes revenues to deficit reduction and retains our progressive system would have much more difficulty achieving other goals—such as lowering tax rates.”
Tax reform today will be more difficult than it was in 1986, Looney indicated. “In that reform, tax rates were lowered substantially and the lost revenue was restored by cutting tax breaks, deductions, exclusions and other so-called tax expenditures. That reform enhanced economic efficiency without increasing the deficit,” he explained. “In the 27 years since then, however, the economic context has changed, making such a reform harder to achieve.”
But does he think such a reform is doable given today’s constraints?
“From my perspective, it’s obvious that we need to improve the tax system, and we should always be thinking about how we can,” Looney commented. “It’s exciting to see that Congress is holding hearings. The wheels are turning at the Joint Committee, which has just issued a 500-plus-page compendium of tax reform ideas.”
In his testimony to the Senate Budget Committee, Looney noted, he “attacked some of the high-level challenges that policymakers face today in their thinking about tax reform.”
“There are tradeoffs,” he said. “If you ask whether or not there is likely to be tax reform, I would say that there doesn’t seem to be a lot of capacity within Congress to compromise now, and tax reform is all about making compromise. The tradeoffs that are important today are related to the most important and economically divisive issues—how to rein in the budget, how to address income inequality, and also to promote growth in American competitiveness.”
Tax reform has the potential to do a lot of good, according to Looney. “It can improve the budget deficit and contribute a modest amount of additional revenue at a relatively low cost, and it can make the system simpler and easier to comply with.”
“People like to talk about simplification,” Looney observed, “but I don’t think that simplification is that important an issue today as perhaps it was in the past. The IRS is in a position above and beyond its traditional responsibility to make sure that taxpayers pay their taxes. Now it’s being asked to administer a whole host of social insurance programs, to police a very complicated international corporate system, and to provide a high level of customer service for what is essentially a voluntary system.”
Even if reform isn’t just around the corner, Looney believes that a foundation is being laid for reform in the future. “Certainly for everyone who works on tax and tax reform, one of their guiding hopes is that the work they’re doing today is paving the way for reform down the road, whether next year or in five years,” he said.
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