Why the United States Must Reform Its Tax System
THE U.S. TAX SYSTEM has become a swamp of unfairness, complexity, and inefficiency. The accumulation of credits, deductions, and exclusions designed to help particular groups or advance special purposes conflict with one another, are poorly designed, and represent no consistent policy. The tax system causes investors to waste resources on low-yield investments that carry large tax benefits, while high-yield investments without such benefits go unfunded. The result is a shrunken tax base that requires needlessly high rates on wages, salaries, and other taxable income. Overall the system undermines the faith of citizens that tax burdens are shared fairly. The time has arrived for basic reform.
The case for rewriting our tax laws would be compelling even if revenues were sufficient to pay for government expenditures--but they are not. Even with Draconian reductions in government spending, the deficit cannot be closed unless revenues are also increased. But raising tax rates on the current highly distorted and shrunken tax base will compound the system's inequities and inefficiencies.
While the need to change our tax laws may be obvious, Congress and the American public receive conflicting advice about exactly what to do. The Treasury Department has advanced one plan. Members of Congress have introduced numerous and diverse proposals of their own. In choosing among these and other plans, Congress and the American public will hear opposing and inconsistent testimony from groups representing business, nonprofit organizations, homeowners, the poor, the elderly--indeed almost any organized coalition one can imagine--about the likely consequences of moving in one direction or another.
To help make some sense out of this chorus of claims and counter- claims, this book dispassionately and analytically examines the issues. To begin, this chapter explains why tax reform is necessary. It also indicates the probable magnitude of the tax increases that will be