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Tax Code Should be ‘Tossed Out,’ Expert Tells Senators

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Tax experts agreed Tuesday that comprehensive tax reform will help boost economic growth, with one expert suggesting the best way to achieve this is to “toss out” the current tax code and start again.

Michael Boskin, economics professor and Hoover Institution senior fellow at Stanford University, told members of the Senate Finance Committee during a hearing titled “Tax Reform, Growth and Efficiency” that likely there’s a “large payoff to a better tax system,” noting the “tremendous opportunity to improve the federal system of corporate and personal income taxation in a manner that will significantly boost economic growth.”

To be sure, Boskin said, “regulation, trade, education, training, immigration and monetary policies can also promote or hinder growth, but tax and spending — and therefore debt — policy reforms are likely to be the most potent.”

John Diamond, a fellow at Rice University’s Baker Institute for Public Policy and CEO of Tax Policy Advisers LLC, agreed that “sweeping reform of the tax system is well overdue,” stating that “given the fiscal crisis facing the United States, fundamental reform must minimize the distortionary effects of taxation wherever feasible, seek to maximize long-run economic growth, and make simplicity a more important goal to achieve reductions in compliance and enforcement costs.”

Diamond told members of the Senate Finance Committee that replacing the current corporate and individual income tax system with a “consumption-based tax would be best.”

Political analyst Greg Valliere noted in his Tuesday commentary that tax reform is indeed “coming,” and that while getting “true reform is a maddeningly glacial process in Washington,” the first hurdle of agreeing that something must be done has already been surpassed.

“Everyone agrees the tax code is broken,” Valliere, of Potomac Research, said. “The great news,” he continued is that Rep. Paul Ryan, R-Wis., chairman of the tax-writing House Ways and Means Committee is “sticking around” and not running for president. 

Said Valliere: Ryan “can move a corporate reform bill in his committee this year; it will be a bill to watch, the first step in a process that could produce corporate and individual reform in 2017.”

Sen. Ron Wyden, D-Ore., ranking member on the committee, noted during the hearing that his constituents in Oregon consistently complain about the “skyrocketing cost” of child care.

“For a long time, people have looked at home mortgages, college tuition and retirement savings as the big-ticket expenses for most families. Parents today know that list is incomplete without child care,” Wyden said.

However, “the programs in the tax code intended to make child care more affordable haven’t kept up,” he continued. “Too often, their benefits don’t cut it. A lot of families get no help at all. For many others, it’s only a meager level of assistance. So a lot of parents are having to make a difficult choice. Do they both continue working and take on the huge expense of child care? Or will one of them have to sacrifice their career to stay home? That’s a barrier to work that tax reform should demolish.” In the coming weeks, Senate and House Democrats plan to introduce a package of bills intended to make child care more affordable for middle-class families, along with college and other expenses. The bills will include expanding tax credits for earned income, child care and education, along with the 21st Century Worker Tax Cut Act, a package of proposals aimed at lower- and middle-income individuals and families.

Senate Finance Committee Chairman Orrin Hatch, R-Utah, plans to convene a hearing on March 3 to examine how Congress should address “fairness” in tax reform.  

“Our current tax system — with its numerous exemptions, deductions, credits and exclusions — is incredibly unfair,” Hatch said. “We need to clean the tax code and reduce the number of tax expenditures to broaden the tax base and lower rates.”

Jane Gravelle, senior specialist in economic policy at the Congressional Research Service, noted at the Tuesday hearing that measures can be taken to “simplify” the tax code, mainly by increasing the standard deductions and by making the tax system “simpler for those who don’t have complicated investments.”

Diamond opined that the U.S. should do what New Zealand did with its tax code: “toss everything out.” New Zealand has a “clean” tax code, he said, because they “tossed everything out and people had to argue for why it should be back in,” providing a “credible cost/benefit analysis” to support their argument.

— Check out House Passes Bill to Make Some Small-Biz Tax Breaks Permanent on ThinkAdvisor.