Tax policy has emerged as one of the few areas that both political parties agree needs considerable reform.

Over the years, the nation’s tax code has become littered with increased complexity, parochial tax treatments, and revenue giveaways that must be curtailed. Lawmakers must address the profusion of specialized tax breaks that cost taxpayers more than $1 trillion in revenue every fiscal year.

With tax day around the corner and in the middle of a heated debate on the extension of dozens of annually renewed tax expenditures, the need for comprehensive tax reform has once again become front and center. Earlier this year and late last year both the House, under Chairman Camp and the Senate, under Chairman Baucus, released comprehensive tax reform proposals and while dramatically different, it is notable that both address billions of dollars in oil and gas subsidies provided through the tax code.

How Republicans Should Approach Revenue Neutrality for Real Tax Reform

Lawmakers will only worsen our budget problems by simply cutting taxes and calling it reform.

Ever since the last major overhaul of the tax code in 1986, politicians across the political spectrum have sung the praises of reform that is revenue neutral. Revenue-neutral reform means there would be changes in rates and policies, but the amount of revenue raised by the overall tax system would remain the same. Some left-leaning think tanks and politicians insist that our more-than-a-decade-long spree of deficit spending, despite the efforts to restrain spending through the Budget Control Act and its successor agreements, suggests that we need more money rather than the same amount. But revenue neutrality has remained a core principle for the Republican Party. Subscribe to our Weekly Wastebasket to see how we’re tracking your tax dollars! How does one achieve revenue neutrality? There are two ways, both of which bring political pitfalls. The first is perhaps the most obvious: lowering rates while also eliminating or curbing tax expenditures (i.e. exclusions, credits, exemptions). This “base broadening,” the argument goes, would offset the cost of lower rates. In the abstract, this sounds good. But it turns out many of the people and companies whose taxes would go up under a new system, like oil and gas companies, tend to be well represented by lobbyists protecting those loopholes. To be sure, many tax expenditures should be eliminated. If Congress wants to subsidize an industry or an activity, it should allocate the money through the annual budget process, not create a special, permanent tax status – this is why the tax code is such a mess. Read more ▻

Tax Reform Turns 30

On October 22, it will have been 30 years since Congress and the president came together to tackle tax reform. Yet, there is a rare consensus that the federal tax code must be overhauled, and even bipartisan agreement on specific reforms.

One area of agreement is corporate taxes. Corporate tax policy is hurting U.S. competitiveness and economic growth. Productivity growth, workforce participation, and median household income have been on the decline since the late 1990s. Increasing globalization has intensified the problems with our corporate tax code, particularly the high U.S. corporate tax rate and our system of taxing international income. Not only is reforming the tax code critical to improving U.S. competitiveness, it is essential to achieving a sustainable federal budget.

The path forward begins with Congress and the next president spending some political capital on bringing about meaningful reform. Without Congress, presidential tax reform plans are political documents – useful in telling us where a candidate stands in the broadest terms, but meaningless in the sense that they don’t tell us how changes will actually be paid for and how they will affect the long term deficit and debt. And no matter how detailed an outline, things don’t get serious until a lawmaker actually puts a proposal into legislation and receives a budget score from the Joint Committee on Taxation and the Congressional Budget Office. And, as we learned in 1986, the president has to keep the focus on getting it done. Read more ▻

Additional Material on Tax Reform

Reform the Tax Code