'We Desperately Need Major Tax Reform! Or Maybe Not…'

Jared Bernstein:

We desperately need major tax reform! Or maybe not…: It is an article of faith in national politics that the reform of the federal tax code is what’s standing between us and faster growth, higher productivity, better jobs, and whatever other good outcome you want to ascribe to this endeavor. ...

The changes in the Federal tax code since 1986, including the substantial increases to the EITC and CTC…boosted the aftertax income of households in the first two quintiles of the income distribution by about seven percent without even counting any benefits from the additional labor force participation... These gains are an order of magnitude larger than the estimated gains from fundamental tax reform, which are generally measured in the tenths of a percent.

So, let’s stop being distracted by the “fundamental reform fairy,” and pursue incremental reforms:

— Close the carried interest loophole that privileges the earnings of investment fund managers. ...

— Block corporate tax inversions, where U.S. companies merge with overseas companies just to move their tax mailbox to a low tax country.

— End the “step-up basis” provision by which the wealthy can pass capital gains on to their heirs tax free.

— Stop incentivizing multinationals to keep, or at least book, their profits overseas by letting companies repatriate their foreign earnings after paying a minimum tax (the Obama administration suggest a 19 percent minimum rate).

— Increase the EITC for childless adults, who now get very little from it, an idea supported by both Obama and House Speaker Paul Ryan (R).

Above, I called these “tweaks” as opposed to major reforms. Though the contrast is apt, it’s the wrong word, as any such changes are hugely heavy lifts. But heavy lifts are at least in the realm of the possible. And that’s the right realm to be in if we actually want to improve our tax code.