Toward Tax Reform

Back in March, President Obama asked Paul Volcker, chairman of his Economic Recovery Advisory Board, to appoint a task force on tax reform. Volcker appointed former Council of Economic Advisers chairs Martin Feldstein and Laura Tyson, former Federal Reserve Board Vice Chairman Roger Ferguson, and former SEC Chairman William Donaldson to the task force. Current CEA Member Austan Goolsbee was asked to assist the group. Here’s the White House announcement:

http://www.whitehouse.gov/assets/blog/Fiscal_Responsibility_Summit_Report.pdf

Little is known about what the task force has been up to. It was asked to report back by December 4, presumably so that its recommendations could be included in the budget and State of the Union address.

In order to assist the tax reform task force, Tax Analysts, publishers of Tax Notes magazine, asked a variety of tax experts to offer some suggestions. Each person was given just 1,000 words to offer whatever advice they would give to the task force if they had five minutes of its time. Thirty-two experts responded and their advice has been collected in a new book that Tax Analysts has posted online for free here:

http://www.taxanalysts.com/www/freefiles.nsf/Files/TowardTaxReform.pdf/$file/TowardTaxReform.pdf

The contributions are a bit uneven. Some are just thin ideological screeds, others cover highly technical fine points. Of those I have had a chance to read, I would recommend the chapter by Eugene Steuerle. If there is an economist with broader or deeper knowledge of taxation I don’t know who it is.

Gene quite rightly points to the Tax Reform Act of 1986 as a model to follow. The essence of its success, he believes, was that the Treasury Department controlled the process from beginning to end. A three-volume report was prepared by Treasury staff that was critical in shaping the basic idea of tax reform and how it should be structured. This report is available online here:

http://www.treas.gov/offices/tax-policy/library/tax-reform/

One of the benefits of such a study, which would have greatly assisted the health reform debate, is that it forces the staff managing the reform effort to think it through systematically. Thus before the tax reform proposal ever went to Congress in 1985, Treasury already knew all the potential problem areas, which provisions were expendable and which ones were not. Consequently, Treasury was able to manage the inevitable trade-offs necessary to get a bill enacted without sacrificing the basic goal.

I would just add from my own experience that the 1986 act was the culmination of a long-term process that began with a lot of discussion on Capitol Hill, at think tanks and elsewhere about ideas such as a flat rate consumption tax, a comprehensive income tax and other options. By the time the Reagan administration sent a formal proposal to Congress the basic idea of tax reform was clear in everyone’s minds. Even so, it took a solid year of work to get a final bill.

This sort of process never occurred with health reform. There was never a study from the Department of Health and Human Services laying out the options, discussing the pros and cons of various alternatives, or with the sort of reference data that is essential for developing really big policy changes. In fact, there has never really been a formal White House proposal. This has made it easy for Congress to take control of the whole health reform debate, with Obama often appearing to be a mere bystander.

I think the administration would have been better served by having followed the Tax Reform of 1986 model. It would have taken a lot longer, but the chances of actually achieving something worth doing at the end of the day would have been much greater.

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