What stands in the way of a simpler tax code? Politics.
The consequences of the federal government's impossibly complex tax code are staggering.
The IRS' Taxpayer Advocate Service estimates that 6.1 billion hours will go into deciphering the code and paying taxes this year - the equivalent of 3 million people working full-time. That's larger than the entire federal civilian workforce. And it produces nothing of value.
Yet there has been no significant effort to fix the mess since 1986, until - perhaps - now. President Obama and lawmakers from both parties are calling it a priority. Whether it's enough of a priority to overcome the army of lobbyists and political constituencies lined up behind each deduction, tax credit or exclusion remains to be seen.
The key is to go big. Americans are likely to support doing away with popular tax breaks only if filing taxes gets easier and tax rates fall.
Thousands of narrow loopholes need to go. These include blatant giveaways to favored interests, such as the one that allows billionaire hedge fund managers to pay a lower tax rate than their secretaries, and a plethora of well-intentioned but complex provisions promoting such things as energy efficiency and alternative fuels.
But Congress will also have to address big and popular loopholes to raise the money needed to lower marginal rates. There are three big loopholes. In order of annual cost to the Treasury, they are: deductions for employer-sponsored health insurance ($181 billion), retirement plans such as 401(k)s and IRAs ($165 billion), and interest on home loans ($101 billion).
Given the demise of pensions and the difficulty of getting people to save, a good case can be made for leaving the retirement tax breaks alone. Limits on health insurance tax breaks are desperately needed, both to raise funds for tax reform and to restrain health care costs, but they have ramifications that reach beyond tax policy.
The mortgage interest deduction, though, just needs to go, if gradually. Nothing would better signal a serious stab at reform than killing off this sacred cow. For starters, it covers mortgages of up to $1 million. Why should average taxpayers subsidize people with such wealth?
Beyond that, it has perverse effects on the economy. Except in areas where land is abundant, its principal effect is not to make homes more affordable but to drive up their cost. The buyer gets a tax break but uses this to take out a bigger loan than would otherwise be necessary. That means the benefit from the federal government goes right through the buyer to help out lenders, real estate agents and, in some cases, builders.
Want proof? Canada has no mortgage interest deduction, yet it has homeownership rates comparable with ours.
The mortgage interest deduction is a kind of microcosm of the whole reform effort. Cutting it back would provide huge savings that could fund lower tax rates, a huge sweetener to getting a deal done.
It's a good bet that if Congress doesn't have the guts to take on the fight, it won't be able to achieve the kind of reform needed. That would be a terrible shame, now and again each April.
- USA TODAY