With the Bush/Obama tax cuts in concrete for another 16-plus months and so many in Congress dead set against raising tax rates, tax reform is the politically acceptable fig leaf du jour on the revenue side of America's budget. That is: carve back credits, deductions and other so-called "tax expenditures" so as to simplify Federal taxes and make them fairer and more collectible. And maybe, just maybe, cut tax rates. What a concept to cheer for!
Who agrees with tax reform? Everyone!
Who will disagree on the details? Everyone who files a tax return.
If you think the army of K Street lobbyists, consultants and contribution-bundlers hit the Hill hard on health care reform, you ain't seen nothin' compared to tax reform with an election year just over the horizon. Not to mention a Congressional up/down vote on the super-committee's recommendations due two days before this Christmas.
So, where's the money in Federal tax deductions, deferrals, credits, exclusions, tax havens, preferential rates and the like? OK, let's use words like "breaks" and "loopholes."
According to Dave Leonhardt of The New York Times, here are the biggest three tax breaks ... along with the amount of money they represent and who benefits from them:
1. Health insurance benefits employers pay are excluded from their employees' income taxes. Not taxing these benefits as wages amounted to giving up $264 billion last year or, as Leonhardt calculated, "Slightly more than the combined budgets of the departments of Education, Energy, Homeland Security, Justice, State and Veterans Affairs." Who benefits? Only individuals who are employees who have employers who give them health care insurance.
2. Mortgage interest. Individuals who are homeowners benefit, particularly those with the largest mortgages (the deduction caps out at $1 million) and maybe two houses.
3. Exclusions for investors - those individuals who make contributions to 401k plans or get lower tax rates on their income from capital gains and dividends - and the beneficiaries of estates. Total: $171 billion or so, an amount that probably is understated.
There are, of course, many more deductions such as for state and local taxes, charitable contributions, education expenses, child care credits ... the list goes on for quite a while. If you don't itemize, you get a "standard deduction" of $5700 for individuals and $11,400 on joint returns. Bottom line: a lot of individuals don't even have to file. Of those who do file (about 130 million of us in a population of 300 million-plus), almost a third wind up paying no taxes at all.
And tax breaks for business look like a bargain in comparison.
At an estimated cost of about $365 billion in 2011 or, as Robert McIntyre of Citizens for Tax Justice puts it, a billion dollars a day, the tax code favors things like accelerated tax depreciation, the investment tax credit, offshoring income, businesses that don't want to be treated as corporations, subsidies for certain kinds of worthwhile activities ...
These and the myriad of other "loopholes" which festoon the Federal Tax Code are estimated to total $1.2 trillion in lost Federal revenues. The Budget the White House submitted to Congress last February for FY 2011-12 estimated the deficit at $1.101 trillion. So ... tax breaks total more than the entire Federal deficit.
What incredible potential for closing the budget gap! Yes, "incredible" is the word ...
... for every one of those back door subsidies and tax expenditures (which are revenues foregone by the Federal government without any appropriations or authorization process except a rare oversight by the two tax-writing committees who created them in the first place) have their own dedicated and ardent backers. And the rationale sounds familiar: "But his mother lets him do it," or "It's a sale, dear, so I saved you money," or "It'll cost us more, much more, if we have to wait."
Can there be anyone who honestly believes that the Congresses who created these tax provisions can stand the political heat of repealing them?
Another fig leaf notion, however, tries to cover objections: tax rates can then be adjusted downward, made "flatter." This completely overlooks that taxpayers would not be evenly or fairly advantaged by a rate reduction in lieu of the tax preferences they treasure. This is particularly for those who pay no taxes at all, such as some 45% of the American population (according to the independent Tax Policy Center) or the biggest corporations in the world (such as GE with its $1.1B tax benefit, Bank of America on its refund of $1.9B on reported profits of $4.4B, or Verizon, Exxon, Goldman Sachs and a host of other mega-corporations - according to Public Campaign's report "The Artful Dodgers.").
Or perhaps we could just scratch the whole progressive income tax system and adopt a VAT or national sales tax like academics and economists have suggested for decades. Of course, a more regressive system would be hard to devise, but there are those who argue that the end result might still be fairer (think of the proceeds from expensive homes and yacht sales!).
For Congresses that shot months haggling over health care and years ignoring the economy and jobs crisis - and who enjoy almost no credibility with the American public short of getting re-elected every two or six years - meaningful tax reform seems unlikely in any political climate short of a tsunami or another ice age.