Tax cut debate reveals need for tax reform

Curtis Powers

There has been a big debate about the Bush tax cuts lately, as they expire at the end of the year. Many are worried that an increase in taxes will plunge our already fragile economy back into a worse recession.

As with many political debates, there’s a lot of sounds bites with little education about what would actually happen. So I’ve spent the last week or so trying to sort it all out.

The one thing that I’ve taken away from this whole debate is this: We need tax reform.

The tax code needs to become simpler and more transparent. Currently, our federal tax code has roughly 3.7 million words and continues to grow.

One shouldn’t need a doctorate in taxation to be able to file his or her taxes or to start a business. One also shouldn’t be making decisions based upon how it will affect his or her taxes.

Unfortunately, this continues to sit on the back burner for most politicians. The only exception seems to be Congressman Paul Ryan and his Roadmap for America, which seems to be the best plan out there, even though it needs some significant tweaking.

That needs to change. There must be more discussion on how to make it easier for the average Jane or Joe to manage their tax situation.

As for the current debate, I think all sides can agree that we are facing a major crisis. While economy continues to struggle, our national debt load continues to grow and is expected to reach 62 percent of GDP by the year’s end, according to the Congressional Budget Office.

Once a nation hits a debt load of 90 percent of GDP, that nation faces serious economic problems. The Washington Times pointed me to a paper by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland, who wrote that once debt-to-GDP ratios rise “above 90 percent, median growth rates fall by 1 percent, and average growth falls considerably more.”

In more layman’s terms, it means the economy would go downhill in a hurry.

The CBO reported that the current budget projections set us on pace to reach 90 percent by the end of 2020 and could reach 200 percent by 2035 due to entitlement spending — Social Security and Medicare/Medicaid.

So it is of the utmost importance to get our economy back on track, increase employment, and then hopefully after that happens, expand our tax base while scaling back spending.

It’s definitely not as easy as it sounds, as you may already know. The only time it has happened in my lifetime was in the late ’90s when our economy was growing, a southern Democrat was in the White House — generally means that Democrat is more moderate — and Republicans controlled Congress.

After reading a lot of different articles, it seems to me it would be unwise at this point to let the tax cuts expire for anyone, even the wealthy. Scott Hodge of the non-partisan Tax Foundation made the best case to me to explain why.

A major reason why is because a lot of the money that would be getting taxed is business profits. For those unfamiliar with business structures, most businesses in the U.S. are sole-proprietorships or partnerships.

Those kinds of business structures pass the profits through to their owners, so it is taxed as their personal income. While it is true that only 3 percent of these business owners would be affected by the potential tax increases, these 3 percent account for a little more than 68 percent of the total business profits earned in 2008 — $588 billion of the $864 billion.

That’s significant.

Also, the Obama administration expects to generate $629 billion in taxes over 10 years from the wealthy. Of that $629 billion, the Tax Foundation found that about $246 billion would come from business income.

So it would seem wise to extend the Bush tax cuts another two years or so for everyone, as the former Office of Management and Budget Director for President Barack Obama — Peter Orszag — suggested in a New York Times column.

Once the economy is back on firmer footing, we can deal with raising taxes and cutting spending. As for now, the only sensible thing seems to be keeping the tax cuts for a little while longer.