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In Simplifying Tax Code, How Do We Get Back to Fundamental Values?

With tax day looming, tax reform is in the air. In his budget, President Obama introduced several proposals aimed at simplifying the tax code. David Cay Johnson, columnist for Tax Analysts magazine, and economist Douglas Holtz-Eakin join Jeffrey Brown to discuss different strategies and whether real tax reform is possible.

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    Yes, taxes are due on Monday. And, yes, once again, tax reform is in the air. It's been more than a quarter-century since the last overhaul, and now President Obama and key leaders in both parties say they'd like to work on simplifying the tax code.

    But if the past is a guide, that it's much easier said than done. This week, the president brought back some of his longstanding proposals as part of his budget. They include capping itemized deductions and exemptions, such as the mortgage interest and charitable deductions, for wealthier households earning $250,000 dollars or more, tax increases on the foreign earnings of American companies, and a rise in taxes to at least 30 percent for individuals earning a million dollars or more.

    We take a look at all of this now with David Cay Johnston, a columnist for Tax Analysts magazine and professor of law at Syracuse University College of Law, and Douglas Holtz-Eakin, an economist and president of the American Action Forum.

    David Cay Johnston, let me start with you, and start with personal taxes that so many people face a deadline on. Help us think about possible reforms. What is the biggest problem with the system right now?

    DAVID CAY JOHNSTON, "The Fine Print": Well, for most people, it is that they shouldn't have to file.

    The government has all the information it needs for people who only get income from wages or pensions. And so if we excluded a small amount of money from dividends and interest, which we did do in the 1970s, we could eliminate tax filing for about 100 million of the 140 million people. So that is at the bottom end.

    At the top end, we allow people to make unlimited amounts of money and not pay taxes on them if they run hedge funds or executives. They can defer the taxes into the future, sometimes decades into the future. And they can borrow in many cases against this money to live on and not pay taxes for a long time.


    Douglas Holtz-Eakin, first, respond to that. Does that sound look a good wish list?

  • DOUGLAS HOLTZ-EAKIN, Former Congressional Budget Office Director:

    Well, that's a good starting point.

    I think the number one thing I would put on that list is the perceived fairness of the tax code.


    Perceived fairness?


    The U.S. has relied on voluntary compliance. And it actually has by world standards a good tax code that people comply with.

    If you lose faith in the fairness of the tax code, people don't comply, you start to have big problems. So …


    And why have people lost faith?


    They don't understand how the tax code works.

    So, I think to begin the discussion on tax reform, you shouldn't talk about what we are going to go get, that sort of money-grubbing approach to tax reform that says, is, I'm going to go get that deduction, I'm going to go get that exemption, I'm going to go find their money, and instead say, we know the tax code is supposed to raise revenue, but what else do we want it to do?

    Do we want it to support growth? Do we want it to hit some fairness objectives? Are we interested in social objectives, like owning a home, going to college? Should it be really simple? Should it be easy to comply with? Figure out what the tax code should mean so it means something and people can see it doing its job.


    So, why — David Cay Johnston, why doesn't that happen?


    Well, because we have all these interests that are out there promoting this or that.

    We have driven up the cost of housing, for example, through the mortgage interest deduction, which is an upside-down deduction. The more money you make, the bigger the subsidy you get. And you have a whole industry that wants to support that. And I think Doug is exactly right.

    We have to talk about what is it we want out of the tax code, what social benefits if any do we want, and how do we raise sufficient revenue? We're raising — per capita adjusted for inflation, we are taking in about 35 percent less in the income tax system than we were in 2000.


    Well, the Republicans talk about lowering rates, but broadening the base or widening the base.




    How do you do that fitting into what we are talking about, simplifying and making people trust the system?


    That's the conventional definition of tax reform, lower rates, broaden the base, have that base be the things we agree should be taxed, and have the things left out of the base be the things, charities or whatever it may be, that we agree should be exempt from tax.

    So that's the recipe. We have seen bipartisan efforts that do that, Bowles-Simpson commission, for example, lower rates, broader-based rate, a lot more money, more than just the current amount. I think the real outlier has been in this administration's desire to have a broader base and higher rates. And that's no one's conventional definition of tax reform. And the question is whether you can get everybody to sign on to that.


    You want to respond to that, David?


    Well, I think we can justify higher rates way up.

    You know, we talk about this as a quarter-million dollar threshold. We have people in this country who make a million, three million dollars a day and, they're taxed at the same rate as people who are in the quarter-million, half-million dollar rate — income level.

    And I think we need to recognize that the system doesn't capture people at the very, very top. And the Bush administration in 2005 acknowledged that — they said, we have made the system more progressive up to the 99.9 percent level.

    Well, the top 10 percent make almost as much as the bottom half of Americans. We should focus a lot on them. But we also want to broaden base. I agree entirely with that. And I think we should try to get rates as low as we can to bring in the necessary revenues.


    So, I think David Cay — this is exactly the discussion that I would love to hear on Capitol Hill, because what he is saying is, yes, we need to raise the revenue. Taxes have to pay the bills of the government. That is the main job.

    And they should be fair. We're going to try to get and make sure the upper end pays taxes because the money there. That's a set of priorities. That tells you what a tax code looks like in Mr. Johnston's mind. At this point in time, I think a fair argument can be made that the second priority, the one past raising the revenues, should be let's grow more rapidly.

    We have very high unemployment. It's been around a long time. We're growing at rates people that don't like. So you're going hear voices that say, OK, I understand that. But in the list of things, when you can't do everything, let's have a tax code that supports economic growth. That affects individuals, but it also affects all those small businesses that are taxed as individuals, and it affects the corporate code.

    So the tax reform debate gets shaped by what your objectives are in a deep way.


    And speaking of the corporate code, David Cay Johnston, because I know this has been a big issue for you, briefly, tell us what the problem is.


    Well, just 2,600 of the six million corporations in America own 80 percent of the assets.

    And under a 1986 law, they can build up unlimited amounts of cash offshore. And they're allowed to siphon profits earned in the United States out of the country as expenses. They pay themselves to their foreign subsidiaries for the use of patents and intellectual properties that they own.

    This is damaging our economy. It's encouraging companies to invest elsewhere. And our rate is too high, given that the rest of the world has lowered their rates. So — but the worst thing we could have, I think, Jeff, would be to lower the rate and not fix these fundamental problems that allow companies to game the system.


    All right, and you're agreeing at with least part of that.


    Oh, yes, certainly. I think we have a corporate tax code that hits the worst of all worlds. It's not helping us compete. It's not helping us grow and it raises no revenue. That's a terrible code. So …


    And the reason for this is again going back to what you were saying before about the interest and…


    Well, it's in part these international transactions.

    So if you think about where you could get bipartisan consensus, I think you could get it on, let's get the rate down to 25 percent. Ours is too high. Let's do it, say, in a revenue-neutral fashion. Let's not have individuals have to pay for corporate reform. Let's make the corporations do their own reform.

    And then you get to the tough part. How do you want to handle the international transactions? I think the solution to that is, let's have a tax code that matches the rest of the developed world and tax companies largely on what they do in the U.S., leaving their Brazilian operations to be taxed by Brazil, and then pair that, before Mr. Johnston jumps in, with a set of geeky rules known as base erosion rules that will be so tough that he will never get to write another book on international tax evasion.


    All right, I'm not going to let him…

    We're going to end the discussion, but we're going to watch carefully to see if this continues on Capitol Hill, as you have suggested.

    Douglas Holtz-Eakin, David Cay Johnston, thanks very much.


    Thank you.

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