January 7, 2008

January 7, 2008 | Commentary on Political Thought

Cracking the Code

To win votes, candidates highlight areas where they disagree. So throughout this election year, we're sure to hear plenty about the differences between the presidential hopefuls.

But back in Washington, politicians have an opportunity to make progress on an issue where there is actually broad consensus: tax policy.

Leaders from across the political spectrum say they want to fix the tax code. President Bush has already done some heavy-lifting, muscling through much-needed tax cuts in 2001 and 2003. He also convened a panel on tax reform in 2005, although he hasn't pressed Congress hard enough to implement its recommendations. Meanwhile, Democratic Rep. Charlie Rangel, chairman of the House Ways and Means Committee, says he wants to "erase" the entire tax code and come up with one that generates just enough income to fund the federal government.

However, as the computer programmers say, "garbage in, garbage out." Before we can improve the tax code, we have to make sure that policymakers are getting good information. For the time being they aren't -- and the bogus data they are getting is costing taxpayers plenty.

Every year the Congressional Budget Office (CBO) predicts how much the federal government will take in through taxes, and how much it will spend. Lawmakers use these forecasts in deciding how much to spend -- and how to pay for that spending.

There are two major problems with the CBO's crystal-balling: First, it assumes that any expiring tax provisions -- such as the 2001 and 2003 tax cuts -- won't be renewed, although it's difficult to imagine that most, if not all, won't. At the same time, the CBO assumes that federal spending will continue at the current level even for programs that are scheduled to expire. In short, the process is set up to favor higher taxes and greater federal spending.

The error of this approach became especially clear last year when lawmakers spent months wrangling over the Alternative Minimum Tax (AMT). The AMT is a parallel tax, set up in 1969 to punish a few dozen millionaires who paid no income taxes.

However, the AMT doesn't take inflation into account - and so it's been gradually snaring more and more people. Late last year, lawmakers finally agreed to extend a "patch" for another year to prevent the AMT from tapping the wallets of about 18 million more taxpayers this year. Good thing. The patch prevented what would have been a $51 billion tax increase.

But because of the CBO's approach, lawmakers were told the patch would "cost" the government $51 billion, even though this is money the federal government has never collected before. Those who say "you can't lose what you never had" obviously don't work for the CBO.

Regardless of political affiliation, lawmakers certainly can agree that they need the best, most objective information available to make their decisions. So this year, Congress should insist that the CBO change its policies and present only unbiased information.

The CBO should treat tax policies and spending policies the same way, using a consistent set of rules based on current policy assumptions. Since higher taxes tend to slow down an economy (contrast Europe's growth over the last decade with our own), we need to eliminate any bias that would wrongly encourage lawmakers to boost taxes.

During the next president's term, tax policy will become even more critical as spending on the big entitlements -- Social Security, Medicare and Medicaid -- grows steadily. We need to keep our economy growing so we'll have a solid tax base, built on reasonable projections, for the new president to build on. For now, though, we're geared toward higher taxes -- and higher spending. That's got to change.

Ed Feulner is president of The Heritage Foundation (heritage.org).

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

Related Issues: Political Thought