Jackie Calmes has a helpful article outlining the Obama administration’s tax reform goals. As a friend explained to me, any effort to overhaul the tax code in time for the coming expiration of the all-but-renewed 2001 and 2003 tax cuts will have to happen this year.
The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much like a bipartisan majority on Mr. Obama’s debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020.
This is extremely encouraging news. And the Bowles-Simpson tax proposal is a good starting point (or, for that matter, stopping point):
Rather than increase individual and corporate tax rates to raise more revenues, a majority of the panel proposed eliminating or reducing many of the popular tax breaks for businesses and individuals that cost $1 trillion annually and using the additional revenues to lower rates and reduce deficits. The majority included five Republicans, among them two of the Senate’s most conservative members,Tom Coburn of Oklahoma and Michael D. Crapo of Idaho.
As we’ve argued many times before, it is far more important to lower marginal tax rates than to lower average tax rates if our goal is to improve long-run work incentives and increase economic output.
Here is my concern: the mortgage interest deduction and the state and local tax deduction are among the most destructive measures in the tax code, yet they’re both a tremendous boon to upper-middle-class homeowners in high-cost, densely-populated metropolitan areas. One would hope that many of these voters would see lower marginal tax rates as a fair trade, but that is far from clear. This is a constituency that votes and donates in high numbers, and that is seen as winnable by both political parties under the right circumstances. If the president decides to nevertheless eliminate both, he’ll have done the country a great service.