Now Is the Time to Reform the Tax Code

With a $5.6 billion budget surplus projected for the coming decade, and with the president and both parties poised to enact sizable tax cuts, we are at a rare political moment - one that should enable us to undertake a major overhaul of our tax structure, as well as to simplify tax returns, reduce rates, and make tax laws fairer.

Our tax laws are riddled with an array of targeted tax preferences and so-called incentives - grievously complicating tax compliance, eroding our tax base and thus necessitating increased tax rates to meet revenue demands. The federal tax code is replete with special deductions and credits, exemptions and exclusions, deferrals and other preferred treatment for particular industries, groups or interests.

That these common techniques - typically justified on a variety of high-sounding grounds - are simply tax reductions for one anointed body or other, was acknowledged by Treasury Secretary Paul O'Neill at his recent Senate confirmation hearings. In response to suggestions that business tax incentives might be good for our economy, Secretary O'Neill answered: "As a businessman I never made an investment decision based on the tax code. If you give money away I will take it, but good business people don't do things because of inducements."

Indeed, both as a former Internal Revenue Service commissioner and as a practicing lawyer, I have found most businessmen's attitude on tax incentives entirely in line with that of Mr. O'Neill. How true is the observation that our tax laws reflect "a continuing struggle among contending interests for the privilege of paying the least."

Beyond this, we continue to see excessive manipulation of the tax laws to promote discrete social or economic objectives. The result: further fueling of taxpayer frustration from added complexities, tax base erosion, and resulting tax increases. All too often, Congress finds this "backdoor financing" route significantly more convenient, albeit more revenue costly, than the better-monitored process of direct appropriations.

Many taxpayers feel left out, discriminated against and abused. Their respect for the tax system is repeatedly undermined; they are less willing to comply. And when weakening occurs in voluntary compliance - which is at the very heart of our tax collection process - our nation pays a high price.

With major tax reductions before us, a unique opportunity presents itself to sweepingly simplify tax reporting, ease tax administration and restore taxpayer confidence in the entire system. Enacting the following changes would put these goals well within our reach:

   - Eliminate the bulk of special preferences, thereby broadening the tax base.

   - Focus on tax return simplification, eliminating all complexities within reasonable revenue costs.

   - Restore a straightforward rate structure, minimizing the hidden tax increases imposed by "floors," "phase outs," "clawbacks," and the like.

   - Repeal the alternative minimum tax for individuals as well as corporations, offsetting the tax base enlargement.

   - Lower all graduated rates across the board.

We, as a nation, would be better served by a broad-based/low graduated rate tax system, with only the most limited of tax favors. Such a regime - aimed at treating all forms of income alike, and providing equal tax treatment for persons with equivalent dollar incomes - would clearly be simpler, fairer and more equitable for our citizenry at large.

With the new administration primed for major tax changes, let us place this fundamental tax reform high on our agenda and let us take the time to do it right.

     Reprinted from The Wall Street Journal © 2001 Dow Jones & Company, Inc. All rights reserved.