Tue, Apr 24, 2012 - Page 9 News List

Working to remove the myths and make tax reform a reality

The US presidential candidates should submit their detailed budget proposals to the Congressional Budget Office for an assessment of their impact

By Simon Johnson

Tax time in the US — the dreaded mid-April deadline for filing annual income-tax forms — has come and gone. The system, US citizens have been reminded, has become painfully complex, with many a loophole through which one might try to squeeze. The fear of an audit by the US Internal Revenue Service lurks in homes across the country.

At such a sensitive time, it is no surprise to hear politicians pitching the idea of “tax reform,” suggesting that they can simplify the system, close loopholes and use the proceeds to reduce tax rates. The allure of such appeals is that a crackdown on others’ tax avoidance will mean that you personally will pay less in taxes.

In the policy jargon increasingly heard in today’s political discourse, tax reform will be “revenue neutral,” meaning that it will not worsen the budget deficit or drive up the national debt. The broader subliminal message is that you can have whatever you currently expect in terms of government services for less than it costs you now.

The problem with this vision of tax reform is that it is magical — an attractive illusion with no basis in reality. Consider the recent pronouncements of Mitt Romney — now the presumptive Republican candidate to challenge US President Barack Obama in November. Romney wants to cut tax rates, mainly benefiting those at the upper end of the income distribution. He also wants to close loopholes, but none of the details that he has offered add up to much. His boldest proposal — eliminating deductions for interest paid on mortgages on second homes — is trivial in terms of generating revenue.

Obama is only slightly better. While he talks less about “tax reform,” he is communicating the message that merely raising taxes on rich people — the infamous 1 percent — will bring the budget and national debt under control. That, too, is a pipedream.

Americans — and taxpayers in many other countries — need a more transparent approach to assessing candidates’ budget proposals. In the US, there are groups that offer their own assessments. For example, the Committee for a Responsible Federal Budget performed an admirable service in “scoring” the fiscal plans of rival candidates for the Republican nomination.

The problem is that in an election with high stakes and deep polarization, who, exactly, can voters trust? Everyone has an agenda, perceived or real. The veracity of any organization that is funded by particular individuals, or through less transparent corporate channels, will be called into question.

What the US and many other countries need is an independent, competent and experienced body that leans neither right nor left. Fortunately, the US has the Congressional Budget Office (CBO), which scores legislation in terms of its budgetary impact, assesses official budget proposals and formulates its own economic projections. (I serve on the CBO’s panel of economic advisers, which comments on the draft forecast twice a year, but does not assess budget proposals or anything else.)

Because the CBO reports to the relevant congressional committees — those dealing with tax and budgets — both Republicans and Democrats watch its every move. However, the CBO, created in the 1970s to bring greater transparency and accountability to the rather byzantine congressional budget process, is independent and run by professionals.

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