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Crusade To Fix Tax Code Gains Steam | KOSU Radio

After leaving negotiations on raising the debt ceiling last Thursday, House Speaker John Boehner said that “comprehensive tax reform … is under discussion.”

On Wednesday, the Senate Finance Committee and the House Ways and Means Committee will hold a joint session on tax reform for the first time since 1940.

The idea of tax reform has been tossed around Washington left and right this month. Most Democrats and Republicans agree that the tax code is unfair and overly complex. But what exactly is wrong with it? What are lawmakers planning to do it about? And would a bipartisan deal actually solve the fiscal crisis?

A Case Study: Capital Gains

While the income tax rate on America’s highest earners is 35 percent, many of those earners actually pay quite a bit less. This is because much of their income does not come from traditional wages, but from stocks and bonds, income known as capital gains, which is taxed at 15 percent.

“It’s an obsolete provision that originated in the 1970s when we had double-digit inflation,” David Stockman tells weekends on All Things Considered host Guy Raz. Stockman, the director of management and budget under Ronald Reagan, supported the measure at the time as a congressman from Michigan. “With double-digit inflation,” he says, “you were taxing phantom gains.”

The U.S. hasn’t suffered from that kind of inflation in 30 years. Since then, the low capital gains tax has become a huge windfall for the rich, and that’s not all.

“Worse, it is an incentive to get all of the high-paid tax lawyers and accountants in the world to figure out ways to transform earned income into capital gains,” Stockman says.

If capital gains were taxed at the same rate as regular income, he says, the government could bring in tens of billions of dollars more each year. But more importantly, he says, ending the perverse incentives could lead to even more revenue down the road when income of all types is taxed uniformly.

Devilish Deductions

For Democratic Sen. Mark Warner of Virginia the devil is in the details, namely, the many thousands of deductions that have been added to the tax code over the past 25 years.

Warner tells Raz that these tax policies “individually might make some sense, but in aggregate, they make our code much too complex.”

Warner proposes a decrease in the top income tax rate — from 35 percent to somewhere around 30 percent — paired with reductions in tax write-offs, such as the home mortgage deduction.

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