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October 7, 2013
Tax Reform Is Coming -- Just Not Yet
by Christopher Bergin

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Christopher Bergin (Tax Analysts/Derek Squires)Christopher Bergin is the president and publisher of Tax Analysts and a former editor of Tax Notes.

Bergin writes that although tax reform is unlikely in the short term without presidential leadership, the House Ways and Means and Senate Finance committees are laying the groundwork for the future, when reform is inevitable.

It may seem strange to predict that we will reform the tax system within the next decade when the current show playing in the nation's capital is "Can Our Government Be Any More Dysfunctional?" But tax reform is coming.

Here are three big reasons why. First, the federal income tax system is a complicated mess. It is a self-assessment system that is so labyrinthine that most taxpayers can't understand it, never mind properly comply with all of it. The system's customers are increasingly frustrated and fed up with it. It is unfair and hurts economic activity, especially the corporate income tax, which has the highest top rate among developed economies.

Second, our tax system is no longer being effectively administered by those who are supposed to understand it best: the people at the IRS. Increasingly inadequate funding and ever-expanding responsibilities (the administration of Obamacare, for example) are creating a perfect administrative storm. Make no mistake -- the IRS is under siege and failing. Its employees are often viewed either as wasteful fools making bad training videos or petty dictators who, rather than helping customers, sadistically enjoy hurting them. We have not yet hit critical mass with the public's contempt of the current situation, but it's coming. And when it arrives, the politicians will have no choice but to address it.

Third, the tax system fails at its number one job. And its number one job is not lining the pockets of politicians with power and money -- it just seems that way. The number one job of a tax system is to collect enough revenue to fund the government that citizens want. At some point we will have to stop stealing our children's money. We won't have to wait for them to grow up to force change, because sometime before then we will be forced to sober up from our spending binge.

But that change is still a few years off. Tax reform can't happen this year or next. Here's a few reasons why. What is tax reform? To have it, we first must define it. Republicans generally believe that a sacred principle of tax reform is revenue neutrality (listen, you can hear the angels singing). Revenue neutrality doesn't mean that the tax reform process won't create new winners and new losers; it means that when the process is finished, the reformed system will collect the same revenue as before. Eh, that won't work this time.

Democrats are the exact opposite. Generally, they think tax reform is about increasing revenue. Some Democrats argue that a reformed tax system should raise almost $1 trillion over 10 years.

The president thinks tax reform means dealing with the corporate tax system. I have no idea how you deal with the corporate income tax system in isolation because I'm fairly certain you can't.

None of this marks the start of a good or successful process.

Some people think the definition of tax reform is the 1986 Tax Reform Act. The problem with that is it's not 1986 anymore. (If you had told me in 1986 that I would have an iPhone and what it was, I probably would have shot back a retort like "What have you been smoking?") Our situation is much different now.

But 1986 does provide instruction for tax reform today. To me, the biggest lesson is the need for leadership from the White House. There are those who argue that tax reform can be led from Congress. The current noble efforts in the House and Senate to start a tax reform process will show otherwise. Executives are so named because they are supposed to execute. President Obama has shown little real interest in fixing the current mess and little understanding of it. No presidential leadership, no tax reform. It really is that simple.

It should also be noted that the American taxpayer is not yet ready to deal with the effects of true tax reform. Yes, it's a complicated mess of a system that is completely unfair and helps the rich and punishes the middle class. But keep your cotton-picking fingers off my home mortgage interest deduction, or my 401(k), or my employer-provided healthcare, or my deduction for property taxes.

Doesn't sound very promising, does it? We just need to wait. That is why the discussion of tax reform is, in my opinion, far from a waste of time. It may not be as entertaining as a government shutdown, but addressing our tax system is more important.

Tax Analysts has launched a new video series designed to educate the public and media on current tax policy issues. The short videos will be featured on Tax Analysts' YouTube channel and our website. The goal is to discuss complicated tax issues, try to demystify them, and provide unique insights into taxes. The videos will feature many of Tax Analysts' experts.

In our first series, Clint Stretch, a senior tax policy counsel at Tax Analysts, and I sat down for a discussion on tax reform. I must tell you that we had a ball. Our rather lengthy discussion has been edited and broken into four easily digestible parts. I invite you to watch it at http://www.taxanalysts.com. Here's a little preview: Clint and I actually agreed on a lot of things. I think the most important is that the current efforts of House Ways and Means Committee Chair Dave Camp, R-Mich., and Senate Finance Committee Chair Max Baucus, D-Mont., on tax reform do not represent the start of tax reform. But they do represent the fact that we are starting to start. Tax reform is years away, but it's coming. I hope you enjoy our conversation.



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