Whatever Happened To Tax Reform?

You may remember that one of President Bush’s top priorities during the 2004 presidential campaign was Tax Reform, a complete overhaul of the federal income tax system. But now, there’s hardly even any mention of Tax Reform, either in the media or from the Bush administration. You’d think that with Congressional elections just around the corner in November, that you’d be hearing some talk of Tax Reform. But again, it’s an issue that’s vanished from the public eye. So, what’s happened to Tax Reform?

Tax Reform, as it was discussed last year, was to have two objectives. The first objective was to streamline or make simpler the massively complex tax code. The second objective was to close the massive $345 billion tax gap, that is, the difference that the government is owed in taxes and what the government actually collects in taxes.

The latest indication that White House interest in Tax Reform has cooled this year is that top Treasury Department officials declined to testify at a recent round of Senate Finance Committee hearings to discuss the issue.

That hearing was designed to explore the Treasury Department’s response to the recommendations of the President’s Advisory Panel on Federal Tax Reform – a group that last October advanced two alterantive approaches to Tax Reform. Senator Max Baucus, D-Mont., summed up the current status of Tax Reform best. “Tax Reform not only went from the front burner to the back burner, it got knocked off the stove. It got kicked out of the kitchen.”

I think that the reason that the Bush administration has not pursued Tax Reform is simply politics. The Tax Reform Advisory Panel’s recommendations were not popular with the taxpaying public and many special interest groups. In particular, there were howls of protests about the Advisory Panel’s proposal to put some limits on the mortgage interest deduction.

However, Tax Reform is too important an issue to let slip away. US Comptroller General David Walker painted an expecially bleak picture, warning that without a restructuring of the tax system, the US will sink deeper into the red.

Also, quick action on Tax Reform is needed because of the large number of expiring income tax provisions that require ongoing debate and reauthorization.

According to MIT economics professor James Poterba, “Uncertainty surrounding these provisions, such as the future tax rates on dividends and capital gains, hampers taxpayer planning and discourages long-term investments. Moveover, the looming problem of the alternative minimum tax creates even more uncertainty for many taxpayers.”

Another big hurdle for Tax Reform is the vested interest of lawyers, CPAs, and many others in the tax preparation industry. After all, a complicated tax code creates many billable hours for these professionals and they are certainly not going to help push for a simpler tax code.