How tax reform can get done in 2016

Almost immediately after taking the gavel, Speaker of the House Paul Ryan announced he will make tax reform—often considered a noble cause but a futile exercise —a priority in the upcoming year.

"Instead of a tax code that all of us can live by, we have a tax code that none of us can understand," he said last month, speaking at the Library of Congress. "The only way to fix our broken tax code is to simplify, simplify, simplify. Close all those loopholes and use that money to cut tax rates for everyone."

Speaker of the House Paul Ryan.
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Speaker of the House Paul Ryan.

The Speaker has the right formula for success, and reform is an effort that politicians on both sides of the aisle should get behind.

Ten years ago, we served as senior staff for a bipartisan tax reform panel appointed by President George W. Bush. The nine member panel, ably led by former Republican Senator Connie Mack and former Democratic Senator John Breaux, unanimously agreed on two bold options for reform. Each option was simpler, fairer, and more growth oriented than our current code.

The sorry state of the tax system a decade ago, which provided the impetus for the panel's creation and effort, has only gotten worse. Here are the most significant problems.

The Tax Code Is Overworked.

The U.S. tax structure has become the primary tool to influence individual and corporate behavior. Instead of focusing on its core purpose, to generate sufficient revenue to run the government, the tax code has become a purveyor of special preferences, effectively picking winners and losers.

The result is an administrative nightmare. Congress doesn't evaluate whether these subsidies are delivered efficiently and in many cases, they duplicate existing spending programs. The IRS has so many priorities besides collecting revenue it now operates as de facto extension of other regulatory agencies.

Moreover, the tax code is locked in an internal tug-of-war between granting benefits and simultaneously limiting their cost. As a result, policymakers have created a multitude of floors, phase-outs, and ceilings to narrowly target taxpayers. For example, the deduction for state and local taxes is subject to a floor from the standard deduction, a limitation from the itemized deduction phase-out, and a ceiling from the Alternative Minimum Tax. This complexity leads to the perception that many don't pay their fair share and our tax system rewards those who can find loopholes to reduce their taxes.

Our Business Tax Code Hasn't Kept Pace.

Our antiquated business tax system has failed to keep up with an economy that has changed dramatically as a result of globalism, technology, and new capital flows. At 35 percent, the US has the highest statutory tax rate among developed countries. Mainly because of that high burden, the corporate tax base has been eroded. More than 60 percent of business profits are now taxed at individual rather than corporate rates because small and midsize businesses increasingly utilize non-taxed entities like LLCs, partnerships and S corporations.

At the other end of the spectrum, multinational corporations are taking advantage of aggressive international tax planning. The recently announced Pfizer-Allergan deal, in which Pfizer would shift its corporate location to Ireland, one of many recent "inversions", shows the lengths US businesses are going to reduce their tax bills and stay competitive.

To be successful, policymakers need to focus on the real benefits of reform - like a tax system that encourages growth throughout the entire economy. Such a goal has proved to be challenging inside the Beltway, where many lawmakers have seen the tax debate as a way to push a political agenda. The domestic oil and gas industry provides a good case study where some routinely label any provision favorably impacting the industry, including those related to cost recovery or industry accounting, as a "subsidy," while also pushing for one-off punitive changes targeted at a small group of companies.

It has been almost 30 years since there was significant tax reform. Just like roads, bridges, and ports that have been neglected for too long, our tax infrastructure is crumbling and warrants immediate attention. Lawmakers recently came together in a bipartisan manner to pass an infrastructure bill. There is no reason that they cannot do the same for tax reform. And the Bush tax panel report still provides a useful playbook for leaders who are willing to move beyond political expediency to consider real reform.

Speaker Ryan has demonstrated political leadership by putting the issue on the table. From Capitol Hill to the White House, policymakers have an obligation, and an opportunity, to follow suit and deliver tax reform that benefits all Americans.

Commentary by Jeffrey Kupfer, Jonathan Ackerman and Rosanne Altshuler who served, respectively, as the executive director, chief counsel, and chief economist of President George W. Bush's Panel on Federal Tax Reform.