Tax reform: beyond lowering income tax rates.

• Author: Nellen, Annette

Meaningful tax reform must include much more than rate reduction and establishing a territorial system. Changes must take into account the overall goals of an overhaul and their implications for the economy, society, and environment and make the best use of modern technology.

In recent years, federal tax reform discussions have centered on comprehensive tax reform. This label does not always seem to fit though. Congressional attention is mostly focused on broadening the income tax base to lower tax rates and to move to a territorial system, at least for business income. Tax reform is a significant task, last done 30 years ago with the Tax Reform Act of 1986, RL. 99-514. Assuming major tax reform happens only every few decades, it is important to do more than match revenue generated from the reduction of a few of the over 200 income tax preferences to reduced income tax rates. While this would improve the tax system, more work is needed to best ensure the creation of a modern and efficient tax system.

Following are suggestions for comprehensive and meaningful tax reform.

Look at all taxes: Rather than only considering income taxes, all existing taxes should be examined. Perhaps some existing taxes should be repealed for simplification and modernization. New taxes might be appropriate, such as ones that address significant negative externalities (such as greenhouse gas emissions and waste). All taxes must be considered to best ensure meeting principles of good tax policy. For example, changes to make the income tax more equitable without considering payroll taxes, which are a significant tax burden for low- and middle-income workers, limit the ability to achieve equity.

Identify and articulate the goals for tax reform: When the goals for any project are not articulated, it is challenging to identify appropriate changes or assess their effect. If the goal is simplification, more is needed than reducing the number of tax rates. The federal tax law is full of complex rules that involve numerous definitions, limitations, special rules, and special recordkeeping. If simplicity is a goal, reform will need to identify the rules and procedures that create the most complexity and simplify them. If greater equity is a goal, a discussion of the appropriate degree of progressivity and how to attain it is necessary. That discussion needs to examine the tax effect on different income quintiles of all existing tax preferences. If economic growth and...