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Written by: Eugene Steuerle
Tax reform will be on the table in 2025. It must be. Congress required that many provisions of the Tax Cuts and Jobs Act of 2017 expire at the end of 2025. If Congress extends every provision, it would reduce revenues by trillions of dollars over ten years relative to what is required by “current law”—the baseline the Congressional Budget Office (CBO) uses to project where the budget absent any tax legislation. Those costs would add significantly to a very high and unsustainably growing national debt. If Congress lets every expiring provision expire, on the other hand, many households could see significant tax increases relative to the tax burdens they faced last year.
Accordingly, no matter what Congress does, it will receive howls of protest. No wonder it has postponed dealing with this issue until the last minute—from 2017 until after the 2024 presidential and Congressional elections.
What to do? Here, I identify eight lessons, some from the 1984 Treasury study for which I served as economic coordinator. That study helped lead to the Tax Reform Act of 1986—the most comprehensive yet bipartisan tax reform in the income tax’s hundred-plus-year history. These lessons do not get Congress out of its current political bind but offer a way to start addressing its economic and social obligation.
1. Know the unique requirements and opportunities of the time. No past reform is repeatable. Today is not yesterday. Society today has new needs, different things to fix, novel opportunities, and changing leadership. Every period has a different level of economic growth, budget constraints, and new-fangled tax shelters.
2. Don’t try to build up reform out of a stack of wants. The more politicians try to organize reform by supporting a bunch of giveaways, as opposed to viable and principled options for fixing different parts of the system, the more likely it is that those giveaways don’t add up, are inconsistent, fail to meet stated objectives, can’t be administered, and cause unintended consequences.
3. Use principles, not symbols, to drive choices. I’m not so naive as to believe that symbols and soundbites aren’t important. However, principles should guide where Congress and the President are going. Although they sometimes conflict and don’t give definitive answers about what to do, they create borders that make it easier to exclude options that don’t meet any principle well. Tax policy principles center on equal justice (“horizontal equity”), efficiency, progressivity (though the degree is open to dispute), and efficiency. The last encompasses limiting the disincentives to work, save, or invest inherent in any tax and ensuring the government can enforce the law at a reasonable societal cost.
4. Build a base by focusing first on the subset of principles, like equal justice or equal treatment of those equally situated, accepted by conservatives, liberals, and independents alike. Over many decades, the primary fight over principles among elected officials has been between progressivity and avoidance of the distortions that higher tax rates create. That still leaves vast amounts of the tax system to be reformed based on widely shared concerns. Families can work together to fix the roof leaks even when in conflict over whether to spend money on a new refrigerator or sofa.
5. Always consider the balance sheet within the broader budget. Nothing deters good reform more than giving away money without immediately calculating who will pay the bill—often future generations who face tax increases, spending cuts, or rising interest costs from higher debt. Tax reform can also achieve much more if part of a broader budgetary reform. For instance, Congress can make tax provisions for children more effective by coordinating them with direct expenditure programs for children.
6. Engage those charity, pension, housing, and other expenditure policies woven into the tax code. With about one-quarter of all federal subsidies lying within the tax rather than expenditure system, these policies are hard to ignore even in a modest-sized reform and impossible to avoid in comprehensive reform. To the extent that tax subsidies are maintained, the dollars should be effectively targeted to stated objectives, such as increasing charitable giving, promoting adequate retirement savings, and encouraging homeownership.
7. Gather evidence continually rather than waiting to provide ex-post apologetics for the final legislation. Among the many reasons for its success in 1986, the Treasury gathered evidence on growing problems, such as the tax shelters of those days. Some efforts at collecting and reporting evidence require long-term investments, such as improvements in individual and corporate tax models. Before 1984, the Treasury and the Congressional Joint Committee on Taxation (JCT) distributed the burden of tax changes among income classes defined by adjusted gross income (AGI). However, tax shelters showed negative partnership income as part of AGI for investments with positive economic returns. Therefore, many rich people showed up as having low AGI, so removing their tax shelters would appear as an increased tax burden on the poor. Tax reform would never have succeeded if the Treasury and JCT hadn’t changed this representation.
8. Empower the plumbers, architects, and engineers—the crews in the Treasury’s Office of Tax Policy, the JCT, the Government Accountability Office, and the Congressional Research Service—if you want a structure that will stand. They often know what pipes need to be welded together, but they can only do what they are empowered and have the time and staff to do. For some reason, smart doctors, lawyers, and entrepreneurs elected or appointed to political positions think they have miraculously garnered the talent to weld together the pipes through which explosive gas flows.
Note that Congress and the president can apply each lesson regardless of the revenue level they eventually agree upon. Sure, interest-group politics will ultimately drive much decision-making, but it helps to abide by some standards when reconstructing a multi-trillion dollar complex.
*The Center for a Responsible Federal Budget published a similar note of mine during the last major tax reform debate in 2017.