Strategy for Major Tax Reform
Tax bills enacted since the Tax Reform Act of 1986 (TRA ’86) have never measured up to its reforms. Here’s a strategy for major reform that compares H.R. 3970 to TRA ’86.
November 8, 2007
by Annette Nellen, CPA/Esq.
On October 25, 2007, House Ways and Means Committee Chair Charles Rangel introduced H.R. 3970 (text, summary (PDF)), the Tax Reduction and Reform Act of 2007, a bill he informally calls the “mother of all tax reforms.” Based on what we have learned from the last major reform effort — the Tax Reform Act of 1986, are we likely to see H.R. 3970 enacted?
Briefly described below are actions and techniques that can improve the chances of a major income tax reform proposal becoming law. These features are also compared with TRA ’86 and H.R. 3970 to gauge the likelihood of H.R. 3970 becoming an enacted reform.
Studies: There must be thorough studies of how the tax law currently operates, its strengths and weaknesses and analysis of possible reforms that would remedy the problem areas.
Cooperation: Both the administrative and legislative branches must agree that existing tax law problems can only be remedied through major reform that will likely affect many parts of the existing tax law and most taxpayers. Both branches must be willing to work together to craft and support reform.
Purpose: In order to convince policymakers and taxpayers that reform is the right direction, the purpose of the effort must be clear. Leaders of the effort should be able to articulate the reasons why change is needed. Knowing the purpose enables legislators to identify appropriate changes and to verify if they address the problems. The purpose for making major changes must be perceived as meaningful to taxpayers. Legislators and taxpayers will not want to endure the change process and the results if they are not convinced it is all for a good cause.
Thoroughness: A thorough review of existing law should underlie the reform efforts in order for it to be major and justifiable.
Resoluteness: Every tax preference has a group that supports it. Thus, every change will have opposition. But, if the change is appropriate given the purpose of reform, legislators must be resolute in pursuing the change; otherwise, the goals for reform will not be achieved.
Policy: The principles of good tax policy (PDF) — equity, transparency, simplicity, economic efficiency and others should be followed.
Transition: Taxpayers have made long-term decisions based on existing tax rules. The pain of new rules that alter past plans can be eased by transitioning in new rules if feasible.
Make everyone a winner: Taxpayers are more likely to accept the loss of favorable provisions if they see that there are also benefits for them, such as lower tax rates.
TRA ’86 vs. H.R. 3970
Change is never easy. Major tax law change is further burdened by the inherent complexity in the law and most taxpayers’ weak understanding of the tax law and related policies. Also, past efforts to do many things with the tax law besides raise revenue, as evidenced by the inclusion in H.R. 3970 of one-year extensions of 32 temporary tax preferences, adds to the challenge of tax reform. That is, the more preferential provisions there are, the harder it is to reach reform by broadening the base and lowering rates as was done by TRA ’86.
Congressman Rangel’s bill will be discussed in Congress. It includes proposals in several areas where studies have shown that reforms are needed, such as to reduce the tax gap and modernize international tax rules. However, H.R. 3970 does not completely address what is needed in these areas.
Along with the myriad tax reform proposals of presidential candidates, H.R. 3970 presents a good opportunity for evaluating reform strategy, particularly identifying the purpose for major reform.
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Annette Nellen, CPA/ Esq., is a tax professor and Director of the MST Program at San José State University. She is also a fellow with the New America Foundation. Nellen is an active member of the tax sections of the AICPA and ABA. She has several reports on federal and state tax reform and a blog.