Challenges and Opportunities for Tax Reform

William Gale, vice president and director of Economic Studies at Brookings, says the current tax system is too complicated, inequitable and inefficient. He says President Obama has to take the lead on reforming the tax code and that taxpayers should anticipate a future of higher taxes and fewer tax cuts.

Transcript

“The broad outline of tax reform has to do with broadening the tax base. That is, getting rid of loopholes and then taxing at lower rates than we currently do. So broad base low rates is the mantra, if you will. Reagan did that in the context of income tax reform, and he did it quite well. The top rate came down from seventy to twenty eight percent during his administration, and the base was expanded to close a variety of loopholes. I think that’s the direction we want to go right now in the income tax. Try to broaden the base, use the revenues we’ve gained there, in part, to cut rates, and in part, to pay off the deficit. But tax reform has to start with getting all the loopholes out of the system, and that’s why it never starts, because people don’t like to give up their particular loopholes. And that’s why we need White House leadership saying, ‘We are going to do this. You can be on the bus or off the bus, but this is where we’re going, and we need your support.’”

“…Obama’s tax panel has three challenges, all of them extraordinarily difficult. One of them is the standard set of issues that any tax reform panel has. The current system is too complicated, it’s inefficient, it’s inequitable – we need tax reform to fix the system. The second challenge they have is that they are working in an era of extremely high budget deficits- not only now, but forecasted to be in the next several years- so they need to be very cognizant of the balance between tax revenues and government spending as they make their proposals. The third constraint that they face is one that Obama imposed on them, and that is that no one with income under $250,000 should face a tax increase. It’s hard to overestimate how much that constrains the creation of effective tax policy. So, because of the three big constraints that the panel faces – in particular, the third one – I’m not very optimistic that they are going to be able to come out with meaningful reforms that could put a dent in the concerns that everyone has about the tax system.”

“…Believe it or not, burdens on low-income working Americans are very low currently, relative to historical standards. In fact, burdens on all Americans are low right now. Taxes are going to represent about fifteen and a half percent of the economy this year. That’s the lowest level since 1950, and so it’s hard to argue under current circumstances that the nation as a whole is overtaxed. In fact, we are running a deficit that’s the biggest since the Second World War, which suggests there’s an enormous misalignment between what the government is spending and what the citizens are paying in taxes. So, I think we are going to have to see, if anything, tax increases in the future – not more tax cuts.”