What ‘tax reform' really means
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Like April flowers, talk of tax reform is blooming everywhere. The difficulty, though, is that when politicians these days say "tax reform," what they're really suggesting, and what people hear, is "tax cuts."

That's a big problem, because the truth is that the U.S. is already following a path of collecting inadequate tax revenues to fund the government we have, much less the one we need — and cutting out small programs like Meals on Wheels won't change that.

As baby boomers age, the number of Americans over the age of 65 compared to adult Americans under that age will increase by 50 percent. And with that increasing proportion of the elderly comes increased Social Security and Medicare spending obligations. The answer does not lie in abandoning these commitments, but rather in addressing our inadequate revenue base.

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The reality is that the U.S. has the smallest total tax take as a percentage of our national income (GDP) of any large developed economy in the world, save South Korea, at about 26 percent of GDP, including state and local taxes. (Germany, by contrast, collects about 37 percent of its GDP in taxes.) Our top individual tax rates are not high by world norms, and those top brackets only bite at income levels much higher than where the top rates apply in many other countries.

 

The nonpartisan Congressional Budget Office estimates that a tax cut that adds $2 trillion to our deficits — a much smaller proposal than that advocated by President Trump when he was a candidate — will lead to slower rather than faster growth, and will send our national debt as a percentage of GDP soaring to truly unprecedented levels.

Nor is the individual income tax system horribly flawed in its design — other than the much-beloved personal itemized deductions (home mortgage interest, charitable contributions, state and local taxes, etc.).

These principally benefit high-income taxpayers (but not the very top of the income ladder), not the middle of the pack. Scaling them back and using the revenue pickup to fund tax reductions for lower-income wage earners would be an improvement, but would require a level of political courage unknown in Washington today.

The corporate tax system is different. Our statutory tax rate there is much higher than world norms, but our actual tax collections are much lower than implied by the statutory rate, due to numerous loopholes and design flaws.

We could enhance growth with a serious overhaul of the corporate tax law — even if the new law raised roughly as much tax revenue as does the current one.

But again, walking back the rash promises made for individual tax cuts to concentrate instead on revenue neutral corporate reform requires political courage — something with which our current Congress is not well endowed.

Edward D. Kleinbard is The Ivadelle and Theodore Johnson Professor of Law and Business at the University of Southern California's Gould School of Law, and a Fellow at The Century Foundation. Kleinbard was one of four individuals honored as 2016 International Tax Person of the Year by the nonpartisan policy organization Tax Analysts. He is the author of a book, “We Are Better Than This: How Government Should Spend Our Money,” published by Oxford U. Press.


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