very generation, official Washington suddenly notices that the tax code has become unfathomably complex and loophole ridden and therefore needs to be simplified for the sake of fairness and economic efficiency. Major tax reform legislation passed in 1954, 1969, and 1986, and we’re due for another round. Indeed, there seems to be enough genuine interest on both sides of the aisle that tax reform may be one of the few legislative projects that get done in the next two years.
But before we launch into yet another bout of tax reform, it’s worth asking a question: Why do we let the tax system get so cluttered in the first place? Obviously, elected officials love to use the tax code to reward interest groups and make social policy, and no power on earth could—or, really, should—keep them from doing that. But just as smart cooks learn to clean up as they go, shouldn’t it be possible for politicians to exercise a little discipline as they legislate, so that the tax code doesn’t become a complete mess and then require a vast emergency scouring?
I think it is possible, and to understand how, consider the drama that played out during the lame-duck session late last year. As you’ll recall, that extremely productive period was kicked off by a compromise between the White House and congressional Republicans to extend the Bush-era tax cuts for two years. Not everyone loved the deal. Liberals wanted the tax cuts for the wealthy to end. Budget hawks would have preferred that all the tax cuts disappeared. But the truth is that there would have been no compromise at all were it not for the fact that the Bush tax cuts had a peculiar attribute: an expiration date. Because the Republican Congress had passed them in 2001 as a budget reconciliation measure (in order to circumvent the normal need for sixty votes), the rate cuts were due to “sunset” in January 2011 absent a congressional vote to keep them going. And that gave the president leverage to demand concessions in return for supporting the upper-income rate extensions. He won payroll tax breaks and other short-term measures to stimulate the economy, plus a new sunset requirement that will provide him and the Democrats the chance to kill the tax cuts for the rich in late 2012.
The vast majority of provisions in the tax code do not operate this way. Once passed, the various deductions, credits, exclusions, deferrals, and assorted other preferences—called “tax expenditures” in budget jargon—just sit there more or less permanently, with new ones piling up on top of old ones and no mechanism forcing lawmakers to reconsider any of them. In this way, tax expenditures are akin to entitlements (like Social Security), and different from discretionary spending (like funding for higher education), which must be voted on in the annual appropriations process. Also like entitlement programs, tax expenditures have no budget: the amount we spend on them is determined by the number of qualified people or companies taking advantage of them. No surprise, then, that tax expenditures have grown considerably as a percentage of the overall federal budget since the last round of tax reform in 1986, while the share of the budget devoted to discretionary spending has fallen.
Now imagine if Congress imposed some kind of sunset requirement on every provision in the tax code, as the GAO and others have long suggested. It would force lawmakers to reconsider and vote on some sizeable portion of those provisions every year. That in turn would give reformers and budget hawks an opportunity to argue and organize against those breaks and compel supporters to expend political capital defending them. Perhaps most tax expenditures would remain so popular with the public or so protected by narrow moneyed interests that they’d survive the vote. But surely some would not. And those that did survive would at least have done so within a fair political process, in which the cost of each break was weighed against the overall demands of the treasury and the ever-changing needs of the country.
By itself, this one procedural adjustment wouldn’t solve all the problems with our tax system. But it would be a significant step toward long-term budget sanity. And it would change the nature of tax reform itself. Instead of something that occurs once a generation, when the political stars are aligned and the complexities of the tax code have become overwhelming, tax reform would be a continual process, a healthy, habitual practice, like washing the dishes before they pile up in the sink.