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In Praise of Comprehensive Tax Reform

The current debate over the tax-cut compromise hammered out by President Obama and Republicans in Congress raises the obvious question: If the bill passes (and that’s certainly not a sure bet at this point, as left and right harden their positions), what will happen in 2012?

Today’s New York Times offers an answer:

…Mr. Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said.

The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much like a bipartisan majority on Mr. Obama’s debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020.

If this is indeed the plan that is forming, it’s good news. There has been a steady drumbeat of support in the Washington wonkosphere for comprehensive tax reform. It’s a no-brainer, really: simplifying the tax code by eliminating the thicket of deductions, exceptions, and loopholes that has come to overwhelm our system will allow government to lower rates even as revenues stay the same.

An Obama Administration push for tax reform also gives it a powerful political weapon approaching the 2012 elections. The message would be: “Forget the Bush tax cuts – they’re expiring. In their place is the Obama tax reform plan.” Though claiming reform is “the only way Obama can win in 2012” might be a little hyperbolic, William Galston is right to say that such a pivot “would enable him to move back on offense and to become the transformative leader he clearly wants to be.”

What should comprehensive tax reform look like? The administration and the Hill could do worse than start with the Wyden-Gregg tax reform plan, which would leave the tax code with three brackets (15, 25, and 35 percent), impose a flat corporate tax rate of 24 percent, and triple the standard deduction, while eliminating a whole host of loopholes and deductions. The plan is expected to cut the average taxpayer’s and corporation’s tax burden while keeping revenue steady.

Next year marks the 25th anniversary of the Tax Reform Act of 1986, a landmark achievement. The massive bill simplified the code and lowered rates, and won bipartisan support. (Here is yet another deflation of the Tea Party’s mythical Reagan: Wouldn’t you know it, Reagan worked with the other party and reached compromise.) The sprawling lawn that is the tax code has been left alone since then, and it is now overgrown. An Obama campaign to simplify the tax code is not the only good policy—it’s good politics.


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