2013 Fall Fiscal Agenda — Tax Reform

Sep 26, 2013

DEADLINE: House and Senate Committees to Markup Legislation this Fall

While there is disagreement on specific remedies, there is broad consensus that our current tax code is broken. There will be an effort in the House and Senate to develop legislation to reform the tax code, which is viewed by nearly everyone to be too long, too complicated, riddled with tax preferences, and not supportive of economic growth.

One prominent strategy that has been discussed is the "blank slate" approach. This would eliminate all of the $1.3 trillion in annual tax expenditures, otherwise known as those loopholes, deductions, subsidies, credits and other special interest provisions that make the system highly complex. The resulting revenues could be used to lower tax rates, reduce the deficit, or a combination of both.

While both the President and Congressional leaders from both sides of the aisle have signaled a willingness to tackle tax reform, there is no doubt it would be challenging. Many of these expenditures, like the home mortgage interest deduction and the charitable deduction, are both popular and expensive. Still, tax expenditures are like spending by the federal government through the tax code, and most economists agree that many of them distort economic incentives and subsidize certain sectors of the economy at the expense of others.

Even if Congress does not pass a tax reform bill this year, it will have to decide whether to extend a large number of tax provisions that are scheduled to expire on December 31, 2013. Some of these provisions are broadly used (such as the tax credit for research and experimentation); others benefit more narrow constituencies (the 7-year recovery period for motorsport entertainment facilities, for example). The single most expensive provision set to expire is bonus depreciation, which was enacted as an economic stimulus measure in 2008.

An effective, comprehensive fiscal plan should include meaningful tax reform that results in more simplicity, fairness and economic growth, while raising sufficient revenue to fund our government’s obligations.

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