If, as The Washington Post reports, Treasury Secretary Paul O'Neill plans to send a tax reform proposal to President Bush before the end of the year, now is the time to set the record straight on what "tax reform" means and why it is necessary.
Since his confirmation as Treasury secretary in early 2001, the current tax code has ranked as Mr. O'Neill's top pet peeve. With all of its carve-outs and exemptions for favored businesses, industries, and voting blocks, the tax code embodies the dark side of representative democracy.
While much has been written about how much time and money individuals waste complying with the tax code, the age-old formula of concentrated benefits for a select few in exchange for broadly diffused costs has continued unabated. As such, the forms necessary to determine whether your political profile makes you worthy of special treatment have become more complex, to the tune of 44,000 pages of rules and regulations.
Currently, the top 25 percent of income earners pay $5 out of every $6 in federal income taxes. A single male earning $50,000 living in a rented apartment can have a greater tax liability than a family of four that owns a house and has a combined income of more than $100,000. Corporations with special connections to legislators can pay nothing in federal taxes, while a business of similar size and revenues can pay tens of millions to the Treasury.
The political process rewards readily identifiable voting segments, those who patronize party and candidates, and campaign contributors. Because of this, the tax code is an incomprehensible mess that mocks any notion of efficient tax collection. Economic growth is undermined as taxpayers invest inordinate amounts of time to comply with the tax and corporations take money that could go toward productive use, like employees, plant and equipment, to invest billions in lobbyists and lawyers to manipulate the tax code.
Few people consider the tax code to be fair or relish the process through which they calculate their appropriate tax liability. But deductions for children, home mortgage interest payments, college tuition, and retirement investments are very tempting. Today's tax code is 8 times larger than it was just 50 years ago because of these provisions.
In the 2000 election, there was a palpable friction between politicians who campaigned for new, targeted tax breaks to add further complications to the code and those who campaigned against the tax code itself. Sen. John McCain, Arizona Republican, received raucous applause for his oft-repeated line, "The current tax code is a 44,000-page catalog of favors for special interests and a chamber of horrors for the rest of America." Vice President Gore would warm up his audiences with talk of middle-class tax credits and special purpose deductions.
The majority of the American electorate now seems to suffer from cognitive dissonance on taxes in that they want special carve-outs for themselves, but don't want to go through the hassle of complying with the tax regulations necessary to provide for such targeted tax relief. Seasoned politicians will recognize this dichotomy and take advantage of it by appropriating the name "tax reform" to policies that are anything but.
Because it would be impractical to oppose "tax reform" in general, politicians will simply shift its meaning, or use modifiers like "family friendly" or "equitable" to describe their "tax reform" plans. Everyone will agree to "close loopholes," but one man's loophole will be another's "indispensable feature of our democracy," and the political-decision making process will produce essentially the same system as we have today.
If Mr. O'Neill is serious when he speaks of fundamental tax reform and President Bush is willing to expend the political capital necessary to achieve such a lofty goal, the administration must take on the process by which tax law is produced as much as the tax law itself. To generate the necessary political support for genuine tax reform, with a single rate and few, if any, deductions, the administration must translate frustration with the tax code's size and complexity into disdain for the political process that produces it.
The fundamental reform of the tax code is a Herculean task that few politicians would be brave enough to attempt. There will be few allies and an entire city of entrenched opponents. Treasury Secretary O'Neill must get the debate off on the right foot by making explicit what tax reform really means before the opposition renders the phrase meaningless.