Committee for a Responsible Federal Budget

Wyden and Gregg to the Rescue

Feb 23, 2010 | Taxes

Rescuing us from the disaster that is the U.S. tax code while reducing the federal debt will require nothing short of a superhuman feat; Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) stepped up today to the challenge with a new tax proposal.

The Bipartisan Tax Fairness and Simplification Act of 2010 would streamline the tax code by eliminating many existing tax expenditures—though notably it would keep some of the more popular (but probably more in need of reform) tax breaks such as deductions for home mortgage interest and charitable contributions, and the health-care tax exclusion. Credits for children and the EITC would also remain intact. Most taxpayers would experience a simpler tax-filing process and many in the middle class would see lower tax bills.

The bill would also consolidate the six corporate tax rates and eight brackets into one flat corporate tax rate of 24 percent—Wyden and Gregg claim this will cut the U.S. corporate tax rate by nearly 30 percent—improving U.S. competitiveness. The legislation also exempts the first 35 percent of long-term capital gains income from taxes.

The courageous twosome deserves credit for tackling such a critical yet daunting task -- during an election year no less -- in a thoughtful manner. With the rest of Washington seemingly incapacitated by the Kryptonite of partisanship and election year politics, their colleagues should take note of how they were able to produce a bipartisan proposal in today’s polarized environment. As Gregg told Politico, "There was a lot of give and take. I'm not happy with everything. Ron's not happy with everything." It shouldn’t require the Batcomputer to figure out that is how the process is supposed to work.

The bill reduces the number of individual tax brackets from six to three – 15 percent, 25 percent, and 35 percent; eliminates the AMT; and introduces a one-page 1040 form that most taxpayers will be able to use. Nearly tripling the standard deduction for middle-class and low-income taxpayers will reduce the need for many to go through the time and effort of itemizing deductions. A larger standard deduction may also make it easier to reform individual tax expenditures like the health-care exemption down the road.

The bill is similar to legislation proposed by Wyden and then-Congressman, now White House chief of staff, Rahm Emanuel, in 2007 – the Fair Flat Tax Act of 2007. That proposal had a higher corporate flat tax rate of 35 percent and taxed capital gains at the same rate as income. The effective rate for the Wyden-Gregg plan is 12.5 percent.

According to the Congressional Research Service, the Wyden-Gregg bill would lose $230 billion in revenue from FY 2010 to FY 2019 compared to the President’s budget, though if Congress were to cut business subsidies, the proposal would be deficit neutral.   However, the bill would lose hundreds of billions of dollars compared to current law. Under either scenario, the tax reform would not help decrease the debt.

Nonetheless, creating a more efficient tax code and slashing tax expenditures for special interests are worthy and essential goals. An efficient tax system can promote faster economic growth, which leads to more revenues. Achieving a sustainable debt-to-GDP ratio is much easier when you can both reduce the numerator – debt—and increase the denominator – GDP. Improving the efficiency of the tax code will be vital to getting our fiscal house in order—and the more any debt reduction plan relies on tax increases, the more important it will be.  

The current debate over extending tax cuts and “no new taxes” pledges ignores the fact that our outmoded tax regime is not up to the challenges of the 21st century economy. Hopefully the Wyden-Gregg legislation will change the debate to modernizing the system and expanding the tax base. Comprehensive tax reform will be crucial to help put the country on a sustainable fiscal path; hopefully we won’t need the Justice League to get us the rest of the way there.