- The Washington Times - Saturday, March 4, 2006

The term “tax reform” is now so loaded down with political and intellectual baggage that it is perhaps time to furl that tattered old banner and start talking about what we really mean. A report by a blue-ribbon panel on “Correcting Dumb Tax Rules That Make America Poorer” would be both more to the point and harder to ignore than a report on tax reform.

Congressional committee hearings on subjects including rescuing Baby Boomers from old-age poverty, how the tax code stifles wage growth, and the tax threat to American hegemony in a world economy would attract more attention than the typically sleepy afternoon sessions on tax reform.

Tax reform started to get off track some years ago when many of its advocates became fixated on the totally impolitic and unnecessary idea of repealing the personal deductions for charitable giving and home mortgage interest.

Because of those in-your-face negatives, many political strategists consider tax reform a high-risk proposition. For example, when word got out the President’s Advisory Panel on Federal Tax Reform was “messing” with charities and mortgage interest, the resulting media furor almost buried the panel’s highly meritorious pro-growth recommendations to remove double taxes from savings and investment.

Tax reform has also been the victim of rhetorical excesses by many of its dedicated proponents. Ringing denunciations of the current tax code, promises to tear it up and start over, and too much confusing academic jargon all combined to make tax reform seem far more radical and experimental than it really is. That distorted picture — and absence of any great groundswell for tax reform (as distinguished from tax cuts) — persuaded many politicians that tax reform is a subject best postponed until some unspecified future date.

Future efforts to remove tax barriers to economic growth must start where the realpolitik of the tax code resides — in the workaday world of Congress’s tax-writing committees. The chances are actually fairly good. The temporary tax cuts enacted over the past few years will probably be made permanent for the simple reason that the alternative is a politically unacceptable tax increase. Another good bet is partial and ultimately full first-year expensing for business capital equipment. That is a genuine blue-collar tax reform that has long had bipartisan appeal and that over time is free of any revenue cost. (The accountants are unenthusiastic because expensing cannot be shown as a “tax cut” on the books. But such fancy-pants niggling is unlikely to trump the big boost to productivity and wage growth expensing provides.)

The political prognosis is also good for continuing to raise and for ultimately eliminating the contribution caps on Roth IRAs and nonretirement savings vehicles. With a 15 percent maximum tax on dividends and gains in general, the revenue cost of exempting the yield on tax-preferred savings is not great. And with the personal saving rate in America having fallen below zero, Congress will be under pressure to act.

Over the longer term, more private saving must be part of any sensible congressional response to the declining role and vitality of Social Security.

Many members of Congress probably will want to make two other game-changing alterations to the tax code — just as soon as they sort out the confusion about border tax adjustments. First, they will want U.S. companies exporting or otherwise competing in foreign markets not to be penalized by U.S. tax laws. (“Let’s export American products, not American jobs.”) Second, they will want to expand the tax base to include foreign companies that get the benefits of the U.S. economy without paying U.S. taxes.

If the taxwriting committees can fend off the spenders, the added revenues from base-broadening could be used to pay for the other tax code improvements. (What politician could resist a $60 billion to $100 billion tax cut for Americans paid for by voteless foreigners?)

Those are the kinds of tax changes members of Congress can successfully talk about at town meetings, county fairs and other grass-roots occasions that make American politics work.

People can understand the whole purpose is to provide jobs and bigger paychecks to send kids to college and pay the mortgage. At that point, the politics of tax reform will become the good politics of economic growth.

Ernest S. Christian and Gary A. Robbins are, respectively, executive director and chief economist of the Center for Strategic Tax Reform. Both also are visiting fellows at the Heritage Foundation in a project focused on the relationship between tax reform, economic growth and personal liberty.

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