IN THE NEWS

Democrats' Challenge on Tax Complexity

by Chris Edwards
The Cato Institute

July 30, 2004

The Democrats have a new charge against the Republicans: tax code complexity is way up in recent years. House Democrats, led by Minority Whip Steny Hoyer, intend to make rising tax complexity an election year issue. Republicans are devoting floor time to tax simplification in the House this week, but there is no denying that they have dropped the ball on this growing problem.

After the GOP assumed power in 1995, Ways and Means Committee Chairman Bill Archer promised to "rip the income tax out by its roots." In a 1996 report, Bob Dole and Newt Gingrich argued: "The current tax system is indefensible. It is overly complex, burdensome, and severely limits economic opportunity for all Americans. We made clear on the very first day of the 104th Congress that our top priority would be to change the status quo . . . there is no status quo that needs more fundamental changing than our tax system."

Unfortunately, it was all talk with little action: The GOP has not moved major tax reform legislation through Congress. Republicans did enact tax cuts in 1997, 2001, and 2003 that included pro-growth reforms. However, many features of these bills increased tax code complexity. For example, the 1997 bill included 11 narrow education tax breaks including a tuition tax credit, an education IRA, and a student loan interest deduction.

The result has been that tax complexity has spiraled upward, as the table shows. After a decade of GOP rule, the number of pages of federal tax rules (tax code, regulations, and IRS rulings) has increased almost 50 percent. Tax forms and instructions are longer, individuals are spending more on tax advice, and there are more social engineering provisions in the code.

Yet there is no shortage of simplification ideas that might gain bipartisan support. In 2001, the Joint Committee on Taxation issued a 1,300-page report full of reform proposals, such as abolishing the alternative minimum tax, a complex add-on tax that will hit 30 million households by 2010. Steny Hoyer recently noted that "we need to obviously deal with the AMT." The GOP ignored the JCT report when it came out, but now they should challenge Hoyer and the Democrats to help them repeal the AMT and pursue other reforms.

In the 1980s, tax reform was a bipartisan concern. Prominent Democrats, such as Dick Gephardt, and liberal think tanks, such as the Brookings Institution, proposed some serious reform plans. Democrats introduced flat tax legislation long before Dick Armey proposed his plan in 1994. Within months of economists Robert Hall and Alvin Rabushka unveiling the original flat tax in 1981, Senator Dennis DeConcini of Arizona and Representative Leon Panetta of California introduced versions in Congress.

Unfortunately, when the Democrats became the minority party in the 1990s, they became reactionary on tax policy. They focused on throwing darts at Republican tax reform plans, and offered few ideas of their own. The Clinton administration showed no interest in tax reform, and hardly seemed to think that rising complexity was a problem.

Of course, there is election-year politics at play when Hoyer calls the tax code an "embarrassment" and Democrat Rahm Emmanuel of Illinois says, "If you're a lawyer or an accountant, this tax code is perfect for you." But like John Kerry's recent proposal for a small corporate tax rate cut, this may indicate a Democratic awakening to the serious challenges facing the federal tax system. The GOP challenge will be to start working with forward-thinking Democrats and craft reform legislation in the next Congress.

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