Tax reform: deja vu all over again? Maybe yes, maybe no

To paraphrase Jefferson, a little upheaval every now and then can be a good thing. The occasional revisiting of settled ideas, challenging of old assumptions, and perhaps even installing of new concepts or a fix or two should be welcomed and even encouraged, even when the rebellion (Jefferson's actual term) relates to as complex and multifaceted a mosaic as the U.S. internal revenue laws.

Among the many sounds heard emanating from inside the Beltway (including, hisses, backfires, grunts, and perhaps even a whine or two) are the grinding gears of the government shifting into forward motion in response to the President's challenge to develop options to reform the Internal Revenue Code that both vexes and employs TEI members. The challenge to the President's Advisory Panel on Federal Tax Reform (a group of businessmen, politicians, and academics)--and ultimately to Congress--is to make our tax laws simpler and more administrable while promoting growth and competitiveness.

Originally scheduled to complete work at the end of July, the Panel is now aiming to issue its report at the end of September. As the Panel continues its efforts, both in public and increasingly in private working groups, only the brave would venture beyond generalities and predict what the group's final work product will look like or, more brashly, which (in colloquial Washington-speak) dogs will hunt or ideas will have legs. At the same time, there have been enough representations TO the Panel from myriad sources and enough public utterances and trial balloons FROM the Panel to offer up some generalities and, indeed, to try to get a jump on the jumpers by offering up thoughts (and some speculation) about what may or may not emerge.

What should we expect from the President's Advisory Panel? Recommendations for fundamental tax reform, characterized by bold, new thinking about how and what we should tax or, alternatively, a surfeit of tinkering with existing taxing regimes and patterns? Interestingly, the process in place may shed some light on this question. While the Advisory Panel is charged to develop options for consideration by the Department of the Treasury, it is the Treasury that will formulate the actual recommendations to be forwarded to the President and ultimately considered by Congress. This two-step process may well permit the Advisory Panel to give serious consideration to fundamental reform considerations without being blown off-course by political winds. At the end of the day, however, what emerges from the Treasury and White House must--to have a reasonable chance of enactment--be marked by realism and pragmatism.

So, here goes with a little realism and pragmatism.

* Two parallel discussions are going on, one focused on individual tax reform and the second concerning corporate issues. While interrelated, the objectives of the two discussions are different, at least in terms of emphasis. Individuals want a tax system that is, first and foremost, progressive and fair. If this goal is achieved, the argument goes some degree of administration and paperwork is a reasonable price to pay. Corporations also value fairness, but are likely to place higher emphasis on a taxing structure that does not disadvantage them competitively.

* Simplicity, while a noble goal in the abstract, all too frequently gives way to the realities of a 295 million-plus populous (electorate) and the myriad interests, policies, and expectations that have been woven into the Internal Revenue Code as part of the country's economic, social, and political fabric. Turning back the clock to "simpler times" (fewer Code and Reg volumes) makes for great sound bytes, but usually is substantively thin. (Representative Barber Conable, the late New York congressman who was a recipient of TEI's Distinguished Service Award and was a survivor of earlier tax reform battles, once put it this way: Just as the perfect is the enemy of the good, simplification is the enemy of fairness.)

* Don't drive (read: "pay for") one set of reforms at the expense of the other. When Congress last took up tax reform in 1986, the business community effectively paid for the lower tax rates accorded individuals. Specifically, the revenues generated by repealing the investment tax credit offset the monies "lost" to individual rate reductions. Alas, in 2005, there does not appear to be a comparably available $120 billion hanging around to "fund" tax reform. The persistent rumblings about the imperative to repeal the individual AMT echo the rate reduction clamor of 1986, with at least one difference. This time round, the number isn't a "mere" $120 billion--it is closer to $1.4 trillion (10-year estimate).

* Don't forget the states. Tinkering with the federal taxing structures can and will have profound state tax effects. At the end of the day, both share the same tax base and feed at the same tax trough. Changing the size or shape of the federal tax "straw" will directly affect the states' ability to adjust its straws. A failure to properly consider sister ,jurisdictions will unduly hamper state jurisdictions from raising sufficient revenue to support their needs.

So where does all of this realism and pragmatism get us? What role does it suggest for TEI or even its individual members? Perhaps a role somewhere between a Sherpa and a flamethrower. A Sherpa, of course, is the sure-footed mountain guide who, by analogy, can lead the way to sensible reforms grounded in realism and practicality. A Flamethrower, by contrast, is someone who declines to stand silently while past mistakes are repeated or unintended results are allowed to rule the day.

As this the tale of tax reform unfolds, four questions should be considered:

* Do the proposed changes make the tax law more or less administrable?

* Do the proposed changes help or hinder our competitiveness at home and abroad?

* Do the proposed changes require one sector to disproportionately pay for the benefits accorded another?

* Do the proposed changes strike an effective balance between the incidence of federal and state taxation?

Assessment of the emerging reform options and recommendations using these criteria should help put the debate on a policy footing and not simply as a competition resulting in winner and losers. As the wheels of Washington grind on, we will all watch and wait.

Next Issue: Some Thoughts about the Tax Department of the Future.

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