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Financial Literacy - Taxes
SPOTLIGHT
The tax system needs an overhaul
The political environment is poisoned because most legislators have signed a no-new-taxes pledge.
Taxes made easy

Interview: Leonard Burman, Ph.D.

The tax code fills volumes -- more than 50,000 pages by some estimates. Does it need to be this complex?

Talking points
AMT
Reform needed
Funding policy
Tax increases
Simplifying the code
Income gap
Consequences of inaction
Capital gains
Health care

The tax code is cluttered up with lots of junk -- credits, deductions and special rules for measuring income of different sorts. Some of it is necessary, but a lot of it is just the result of pandering to particular interest groups and a lot of micro-managing by policy makers. It makes the tax code almost impossible for ordinary folks to fully comprehend, and makes many think that others are getting more than their fair share. It used to be that most Americans thought that the income tax was the fairest, but now it has become the most reviled tax.

The tax code is sorely in need of a major overhaul -- one that would make it fairer and simpler and more conducive to economic growth. Unfortunately, a lot of the plans around that claim to offer fairness would vastly increase burdens on low- and middle-income class households, or would slash tax revenues well below those needed to finance current and foreseeable levels of government services.

What can be done about the big disconnect between tax revenues and government commitments?

Long-term budget prospects for the U.S. are abysmal. If current policy continues, debt would equal four times GDP by 2050 and even though 2050 feels far away, that estimation is overoptimistic because it assumes continued robust economic growth, which won't happen if we become a fiscal basket case.

It used to be that most Americans thought that the income tax was the fairest, but now it has become the most reviled tax.

Places like China and Korea have been propping up our currency, but there are limits to their ability to do that. And if China becomes friendlier to foreign investment, Asians and others will have a strong incentive to put their money in China rather than in U.S. treasury bills. When foreign governments stop propping up the U.S. bond market, it is likely to collapse, dramatically raising interest rates, making it even harder for the government to balance its books as well as stifling consumer spending and business investment. It's not a recipe for continued economic growth.

Anti-tax activists like to cite the "starve-the-beast" theory, where if we don't fund the government it will necessarily need to cut back, but that hasn't been the case. Government spending has increased while taxes decreased. If anything, by saying that we don't need new taxes to fund new spending, we've eliminated the most meaningful restraint on the beast.

To take one example, although President Bush understands that the growth in entitlement programs for the elderly is the largest factor driving the growth in government, his only tangible response has been to push through the largest new entitlement program since Medicare was enacted in the 1960s -- the new prescription drug benefit under Medicare. The beast is alive and well.

If we're going to avoid financial disaster, the government will have to recognize the constraints it faces. But, for a while now the government has been acting like Santa Claus -- as if its only purpose is to give out goodies in the form of new spending programs and lower taxes. Any business that's run that way would be bankrupt. As I was a Clinton appointee, it's fair to say I'm left of center, but the consensus among experts across the political spectrum is that the current system is not sustainable.

-- Updated: Dec. 26, 2007
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