May 9, 2012

May 9, 2012 | Commentary on Tax Reform

Congress Should Do the Two-Step in Tackling Tax Policy

"Fiscal cliff." "Taxmageddon." Whatever you call it, it's really bad - and it's looming over America's economy and its taxpayers.

Slated to arrive on Jan. 1, the nearly $500 billion tax hike is so massive that it has brought about what many regarded as impossible: consensus. There is broad agreement that most of this tax hike must be prevented. The debate is really only about how much and when.

At the same time, there is a growing consensus in favor of tax reform. Both President Obama and presumptive Republican nominee Mitt Romney have called for reducing corporate income tax rates substantially. With such an obvious need, many members of Congress are frustrated with the lack of progress on tax reform.

Many also express a reluctance to prevent Taxmageddon without tax reform, suggesting that doing so smacks of once again "kicking the can down the road." While these frustrations are understandable, nevertheless, as matters stand, the correct two-step sequencing legislators should embrace is to prevent all tax increases now while working for tax reform in 2013.

Step One: Preventing Taxmageddon

On Jan. 1, among other unfortunate tax consequences, income tax rates shoot up, the child credit is cut in half, taxes on saving shoot up, the payroll tax shoots up, and much, much more. Collectively, this would by far be the largest tax increase in history. The effects on families and businesses would be devastating; the effects on the economy no less so.

Congress should make current tax policy permanent and eliminate, once and for all, this cavalcade of tax increases. At the same time, Congress should repeal Obamacare and in the process eliminate its own panoply of harmful taxes. In the event it does neither, Congress should delay these higher taxes for as long as possible, whether one year, two years or longer.

Nor should Congress wait until after the election to act. Taxpayers deserve more respect from their elected officials than leaving them in doubt about facing a massive tax increases. The economy also needs better tax certainty. And on this issue voters should be able to cast their votes in November based not on what members say they will do, but on what they did before the election.

Also, without question Congress should not kick the can down the road into early 2013, much as it did with the payroll tax hike prevention enacted late last year. Just as taxpayers don't need a massive tax increase, they don't need the oppressive uncertainty of delaying Taxmageddon for a few months into 2013 only to face it again in the spring.

Step Two: Fundamental Tax Reform

Preventing Taxmageddon is not fundamental tax reform. Yet the consequences of not preventing it clearly move in the opposite direction of sensible reform. Consider the growing consensus to reduce the corporate income tax rate. A lower corporate tax rate is inconsistent with raising individual income tax rates - which happens if Taxmageddon strikes.

True tax reform, involving the ideas contained in the Heritage Foundation's New Flat Tax or even older proposals, generally involves reducing the tax bias against saving and investment. This is inconsistent with raising the tax rates on dividends and capital gains - which happens if Taxmageddon takes effect.

Even moving to a truly simplified, economically neutral tax system is an epic undertaking. Thus, it requires three essential elements to move forward. First, it requires a consensus as to the goals. This consensus appears to be coalescing, at least with respect to corporate tax rates, which is a start.

Next, fundamental tax reform will require many lawmakers to become better informed about current tax law and the new direction than they appear to be today. This is necessary both for understanding the reforms and for explaining them to their hopeful but anxious constituents.

Finally, tax reform will require clear vision and unwavering support from the president. Both the vision and the support have been sorely lacking in this administration. Hopefully, whoever is president in 2013 will give tax reform the attention and support it needs and deserves.

Preventing the massive tax hikes of Taxmageddon and advancing tax reform are related, but separate issues, and by virtue of the calendar and electoral context must be addressed separately and in the proper order. First up must be preventing Taxmageddon. But then Congress should use the ensuing window of time to advance tax reform.

J.D. Foster is the Norman B. Ture senior fellow in economics of fiscal policy at the Heritage Foundation.

About the Author

First Appeared in The Washington Times.