Mar 12 Time to prune the tax tree again

For the longest time economists have pushed for tax reform that has included broadening the tax base while reducing rates. Former CBO director Alice Rivlin -- surely no conservative -- suggested as much in 1982:

Lower tax rates increase the incentive to work, save, and invest, and they decrease the incentive to borrow. They therefore push in the right direction relative to the economy's need for greater productivity and capital formation, though the improvement that can be attained in these areas through the tax system alone should not be overestimated. At the same time, lower tax rates have numerous technical benefits. Distortions caused by the tax treatment of interest and debt during inflation, the double taxation of corporate-source income, the incentive to make use of tax shelter schemes, the marriage penalty, and the incentive to conceal income in the so-called "underground economy" would all be at least partly corrected if tax rates were lower and the rate schedule correspondingly flatter.

Rivlin's work joined work of the Reagan White House and a bipartisan group of legislators in passing the Tax Reform Act of 1986, the most recent comprehensive tax reform done.

Over the succeeding years presidents and legislators of both parties have tinkered with tax policy, reducing some of the efficiency gains made in 1982 (TEFRA) and 1986. Seems like once a generation you need to prune the tree of tax credits and deductions.

Along come Senators Judd Gregg (R-NH) and Ron Wyden (D-OR) to propose a new tax reform bill. Titled the Bipartisan Tax Fairness and Simplification Act of 2010, it reduces the number of tax brackets from six to three, caps the top rate individual tax rate at 35%, cuts the onerous corporate income tax rate to 24% from 35%, eliminates the alternative minimum tax, and pays for it by eliminating a slug of tax preferences, exemptions, credits, deductions, etc. (Here's a list from Sen. Wyden's office.) Unlike the more radical proposals it leaves intact the popular mortgage interest and charitable giving deductions. Senator Gregg has a page that includes a one-page Form 1040 that is simpler. With a standard deduction of $30,000 for a married couple and $15,000 for a single, there would be far fewer people using itemized deductions too. It also includes extending the most popular credits from the previous tax legislation in 2001 -- the plumped-up earned income tax credit, the dependent care and child credits -- and kills off the cap on itemized deductions. That part might not be too popular but it is in keeping with its chief philosophy of holding marginal tax rates modest.

The bill is S.3018, which unlike the health care bill you can actually read, and at 186 pages doesn't take too long. It is a very good idea, and at a time where we have many hidden tax changes coming, a debate and passage of S.3018 provides both information to the public and a chance to prune the tree for the next generation.

Cross-posted and comments welcome at SCSU Scholars.