WASHINGTON — Rep. Bill Thomas, Republican of California, recently pledged to use his last year as chairman of the House Ways and Means Committee to promote tax reform. If the past is any guide, he and his conservative allies will advance a “flat tax,” and progressives will attack the idea as unfair. The critics will be right, but this year, they should offer reform plans of their own.
In addressing tax reform, Mr. Thomas will be stepping into the vacuum created by President Bush’s abandonment of his own tax plan. In 2005, Mr. Bush pledged to “give this nation a tax code that is pro-growth, easy to understand, and fair to all.” He appointed a bipartisan commission that delivered recommendations in September. And he immediately shelved its proposal.
The commission’s approach seems to illustrate the sad fate of serious attempts at reform. The commission included thoughtful policy, such as limiting the home mortgage deduction, that would have provoked popular opposition.
But tax reform still makes political sense. In far too many ways, the tax code today was designed by and for the interests with the most influence in Washington. Today’s conservative leadership is deeply connected to those interests and can hardly take them on. But progressives can. And as they do, they will not just make the code fairer, they will also make the economy stronger. Special interest tax breaks are driving up deficits, distorting investment decisions and restraining growth.
Real reform should be built on four principles.
First, we should eliminate the growing bias within the tax code against labor income and in favor of unearned income – capital gains, dividends and inheritances. President Ronald Reagan signed into law legislation equalizing the top tax rates on labor and capital gains. But today, because of Mr. Bush, capital enjoys a 20-percentage-point advantage.
This not only has set up obscene opportunities for CEOs to cut their taxes through shell-game arbitrages, but it also has failed to increase savings and has undermined incentives for working people to invest in their skills. As Democrats John Edwards of North Carolina and Sen. Ron Wyden of Oregon have advocated, we should move toward equal capital-gains and income tax rates for high-wage earners.
Second, where tax advantages remain – for retirement, health care and the like – we should make them work for everyone. Today, when a secretary puts a few dollars into her retirement account, she gets a 15 percent or 25 percent tax break. When her boss does the same, he gets a 35 percent break because of his tax bracket. That is not just unfair, it is inefficient. We should offer tax credits worth the same to all taxpayers.
Third, we need tax simplification that honors American values. That’s not a flat rate that raises taxes on secretaries and lowers them on millionaires. But with a smart tax system at the top, we can afford to eliminate the alternative minimum tax, a growing burden on the middle class.
We should simplify the earned income tax credit – an important program for low-wage workers that is so complicated today that three-fourths of recipients pay tax preparers for help. And we should eliminate the tax rules that encourage companies to move their headquarters to Bermuda and their operations to China.
The final point may be the most important, even if it is no fun. The main point of the tax code is to raise enough money. The code today is failing to meet that goal, leaving us with record deficits and an inability to meet pressing needs, from health to education to homeland security. Tax reform along the lines above would not close the entire gap, but it could help raise revenues by restoring fair taxes on wealth and the wealthy while reducing the tax burden on families struggling the most.
Those struggling families deserve to be at the center of American tax policy. A politician who puts them there will offer a good policy, with smart politics, too.
John S. Irons is director of tax policy and Robert Gordon is senior vice president for economic policy at the Center for American Progress. Their e-mails are [email protected] and [email protected]. This column was originally published in the Baltimore Sun on March 23, 2006.