Reforming Taxes for Economic Growth
With the Republican takeover of the White House and Congress, the prospects for significant tax reform are strong in 2017. The last overhaul of the U.S. tax code was more than 30 years ago, and many lawmakers feel it’s time to comprehensively modernize the tax system. However, ideas about how to reform taxes vary widely, and the process for reform is fraught with difficulties.
By Robert Spendlove
Zions Bank’s Economic and Public Policy Officer
Why Reform Taxes?
The U.S. tax system is suffering from years of neglect and manipulation. It is complex, inefficient and confusing. It has many loopholes, which promote tax avoidance and evasion. These inefficiencies benefit some individuals and groups over others, which hinders economic growth. Without a concentrated effort to reform the tax code the problem will get worse.
Goals of Tax Reform
When considering comprehensive tax reform, it is helpful to consider the ideals of a tax system. This can be represented by the acronym of the TREES of taxation.
A tax system should be:
• Transparent. It should be clear and easy to understand.
• Revenue Sufficient. It should provide for the needs of funding government.
• Efficient. It should not overburden the economy and should not hinder growth.
• Equitable. An individual’s tax obligation should be based on the ability to pay.
• Simple. It should be as easy as possible to pay taxes.
The primary goal of any tax reform proposal should be to broaden the base, lower the rate, and remove credits, and exemptions from the tax system. In other words, by ensuring the broadest possible distribution of taxpayers and eliminating tax avoidance mechanisms, taxes for each entity can be as low as possible. The Simpson-Bowles Commission on Fiscal Responsibility and Reform cited this goal as a top priority of any reform efforts.
Plans for Tax Reform
During the past several years, many proposals to reform the tax code have been introduced, including “The Tax Reform Act of 2014,” “The Progressive Consumption Tax Act,” “The American Business Competitiveness Act,” and the “Simplifying America’s Tax System” plan.
The proposal that seems to have the most momentum is the “A Better Way” tax reform blueprint by House Speaker Paul Ryan. The blueprint focuses on encouraging greater simplicity and fairness, promoting jobs and economic growth, and restructuring the IRS to make it more responsive to taxpayers.
Process for Reform
Congress has studied tax reform for several years. The House Ways and Means Committee and the Senate Finance Committee have held more than 50 hearings combined, examining all aspects of tax reform. The focus of these hearings was to look at how the tax code impacts individuals and families, how it affects business decisions and economic growth, and how it influences the U.S. financial system.
The next step is for Congress to actually start moving legislation. Bills are being drafted with specific proposals and plans to update the tax system. Although Republicans control Congress and the White House, their margins are relatively slim, which means leaders will need to reach out to Democrats to build consensus for reform.
Challenges Facing Reforms
There are many groups and individuals who benefit from the current system and will resist change. Every tax deduction, exemption and credit has an interest group that will fight attempts to remove them. In addition, partisanship and politics will influence any reform attempts. For instance, progressive groups will argue that the tax system should focus on an equitable allocation and an individual’s ability to pay. Conservative groups, on the other hand, will resist any reform proposals that result in tax increases.
The success of comprehensive tax reform will depend on whether Congressional leaders can overcome opposition by special interest groups and implement fundamental changes. The window of opportunity could be relatively small, since the early stages of the 2018 midterm elections begin in the next few months. If Ryan and other leaders aren’t successful this year, it could be a long time before tax reform is possible.
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