Monday, April 20, 2009

Untangling our taxes

Here is a Los Angeles Times editorial from April 17, 2009:
Obama's vow to simplify the rules will be stymied by a thicket of credits, deductions and exclusions.
April 17, 2009

On Tax Day, the most beguiling promise an American president can make to the millions of people rushing to complete their Internal Revenue Service forms is to pursue a simpler tax code. So it wasn't surprising to hear President Obama make that pledge Wednesday, a little more than four years after President Bush announced a similar plan to study tax simplification. But coming up with a less-convoluted way to finance the federal government is the easy part, relatively speaking. As Bush discovered when his task force came up with an actual plan, the hard part is persuading anyone to give up the subsidies that make the code so complex.

Obama's gesture came as "Tea Party" protesters held rallies across the country to complain that the administration's fiscal plans will force taxpayers up and down the economic ladder to part with more of their earnings. In response, the president touted the tax cuts already adopted for students, businesses and taxpayers making less than $250,000 a year. He also announced that his Economic Recovery Board, led by former Federal Reserve Chairman Paul Volcker, will "do a thorough review of how to simplify our tax code.” The board's report is due by the end of the year.

The president failed to point out, though, that the tax cuts he promoted are part of the problem Volcker was asked to solve. Taxpayers face a thicket of potential deductions, credits and exclusions because Congress and the White House use the tax code instead of direct subsidies to promote certain types of behavior. For example, to boost sales of cars and homes, this year Congress added a temporary deduction for automobile sales taxes and expanded the credit for first-time home buyers. Over the years, lawmakers piled on layer after layer of benefits for social aims, along with a dizzying array of incentives for businesses and investors. Meanwhile, they played a cat-and-mouse game with tax accountants, tweaking the code to deter the gimmicks that shifted income into less-taxed categories.

The credits, deductions and other subsidies all have devoted constituencies now, which makes it difficult for Washington to eliminate them unless it also cuts tax rates dramatically, as it did in 1986. Unfortunately, Obama has tied the hands of Volcker's group by declaring that no one earning less than $250,000 will pay "a dime" more in taxes. It's hard enough to find a way to reform the tax code that keeps revenues roughly even with where they are today, but it's well-nigh impossible to avoid creating some winners and losers in each bracket -- with the losers sure to throw more tea parties. Although we welcome Obama's push for a simpler tax code, we wish he were giving it a better chance to succeed.