Will 2013, the 100th anniversary of the income tax, be the year that Americans begin to benefit from a simpler tax code?
Tax reform efforts in the U.S. Senate received a boost today as Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) reached out to fellow senators for their input on a new tax code. Setting forth the challenge, the Finance leaders indicated that any tax breaks in the new code must be supported by “clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.” Colleagues were asked to submit specific, legislative language for any deductions, credits, or exclusions that they believe should be part of a reformed federal income tax.
Senators Baucus and Hatch clearly presented the trade-offs before Congress. While they acknowledge that there is not yet agreement among senators on whether tax reform should be used to lower rates, reduce deficits, or some combination of the two, any tax expenditures that are part of the new code would limit the ability of reform to achieve any of these possibilities. For example, according to calculations made by the Joint Committee on Taxation, adding $2 trillion of tax expenditures to a blank slate individual income tax code would mean forgoing that amount of deficit reduction, marginal rates that are 1.3 to 2.2 percentage points higher, or some combination.
Additionally, the letter to colleagues noted that comprehensive tax reform may include changes to features of the code that are not tax expenditures, but are ripe for simplification, along with a focus on other revenue provisions outside of the income tax.
This approach of starting from a “clean slate,” similar to that used by the Bipartisan Policy Center’s (BPC’s) Debt Reduction Task Force and the Simpson-Bowles Fiscal Commission to reach consensus, has considerable promise to yield a simpler, fairer tax system. BPC’s Task Force recommended that such a reform both raise revenue and lower marginal income tax rates, while preserving a handful of carefully-designed tax expenditures, including a refundable earnings credit to encourage work and 15-percent refundable tax credits for charitable contributions and mortgage interest.
The Baucus-Hatch request to colleagues is an important step in developing the Senate’s own proposal for tax reform. We hope that senators will participate and help make 2013, the hundredth anniversary of the modern federal income tax, the year that Americans begin to benefit from a simpler, fairer, more pro-growth tax code.