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Tax Compromise Makes Reform More Urgent, Not Less

David Godow
December 15, 2010, 10:55am

As the passage of the Obamapublican tax compromise becomes somewhat more likely, both the progressive and conservative wings of tax policy wonkdom have latched onto the same point: a temporary extension of tax rates not only kicks the can down the road on comprehensive tax reform, but itself inserts uncertainty into the marketplace.

Alicia Hansen at the Tax Foundation's blog points out an article at The WSJ that highlights the dangers of a "permanently temporary" tax system:

This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.

The level of uncertainty, unusual for developed nations, complicates planning and discourages hiring and investment, many economists and corporate executives say.

Meanwhile, the progressive Tax Policy Center's Howard Gleckman tears into the tax deal on the same grounds:

Like the dozens of special interest tax breaks that get extended a year or two at a time, we now seem on the way to doing the same for the basic structure of the income tax. It is the worst of all worlds, combining the uncertainty of temporary tax law with the massive (but hidden) cost of never-ending tax breaks.

(...)

It would be nice if Congress did what former Budget Director Peter Orszag, my Tax Policy Center colleague Len Burman, and others have suggested, which is to use the next couple of years to enact serious tax reform. It would be nice. But it won’t happen.

While the two sides of the tax policy divide will spend the next few years battering each other over competing ideas for reform, at least everyone can agree that the debate needs to start now, not in 2012. The Bowles-Simpson plan, though far from perfect and unacceptable at points, at least offers a good framework to start debate on the issues. Let's hope that Congress doesn't sweep it (and the issue) under the rug in the new year.


David Godow is Research Assistant


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