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Tax reform rhetoric and reality

On Tax Day, everyone's in favor of tax reform.

Nobody can survive the ordeal of preparing a federal income tax return without concluding that there must be a simpler, fairer way to pay for the federal government.

President Barack Obama spent much of last week promoting his "Buffett rule," a proposal to require anyone who makes more than $1 million year to pay federal taxes at a minimum of 30 percent. It's a matter of basic fairness, he says.

Mitt Romney, the presumptive Republican candidate, rejects the Buffett rule — and all other tax increases, for that matter. He says he'd reform the system by lowering tax rates for everybody and pay for it by reducing tax deductions and cutting federal spending.

And there's the problem: Both candidates claim they want "tax reform," but when they say those words, they're really talking about other things.

Obama's Buffett rule wouldn't clean up the tax code; in fact, it would add more complexity. It's a campaign talking point framed as an easily understandable appeal for equity, and one that also takes a swipe at Romney, who paid an effective tax rate of about 14 percent in 2010. Obama says he's for comprehensive tax reform, but he's never actually offered a full-scale tax plan, merely a bare-bones list of principles (lower rates, simplification) stapled to proposals that don't always easily fit them (higher rates for the wealthy, the Buffett rule).

Romney's "reform" isn't much better. His proposal is really about reducing the burden on upper-income taxpayers and shrinking the federal government, not fixing the tax code.

Romney says he wants to limit the deductions, exemptions and credits that upper-income taxpayers can claim, a laudable half-step toward tax efficiency. But his plan doesn't specify anything, which means, in the end, that it's not much simpler or more specific than Obama's proposals.

So what sounds like a campaign debate over taxes is really just 2012's version of the perennial argument over the proper size and scope of the federal government. How we pay for it — the shape of the tax system — is an afterthought.

Among policy wonks and thoughtful politicians, there's a fair amount of bipartisan consensus that, to achieve efficiency, fairness and simplicity, we need fewer tax incentives that distort economic decisions. Even Obama and Romney agree in theory on the basic principles: establish lower tax rates (on most taxpayers, at least) and a broader tax base (meaning fewer deductions and exclusions). The problem with getting it done is this: Everyone loves lower tax rates. But almost everyone also loves his or her favorite tax deduction.

The easiest way to lower tax rates and streamline the tax system would be to eliminate "tax expenditures," the deductions and exclusions that shelter big chunks of income from taxation. That would make your tax return much simpler and bring in billions of dollars of new revenue.

But look at the three biggest tax expenditures last year. First comes the tax-free treatment of health insurance premiums paid by employers. Second, the mortgage interest deduction, which the real estate industry promotes as help for first-time home buyers even though it also subsidizes million-dollar vacation homes. Third: tax deductible contributions to 401(k) plans. No politician is eager to wade into the protests that would greet a proposal to abolish any of those.

When the presidential candidates tell you they're all for tax reform, what they mean is this: They're for shifting the tax burden up (Obama) or down (Romney); for increasing revenues (Obama) or shrinking government (Romney). Fixing our tangled, infuriating, inefficient tax code? Sorry. That will just have to wait for another day.

© 2012 the Los Angeles Times

Tax reform rhetoric and reality 04/16/12 [Last modified: Monday, April 16, 2012 4:54pm]
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