What ever happened to tax reform?

@CNNMoney August 2, 2011: 4:40 PM ET
President Obama and Speaker Boehner tried to strike a

President Obama and Speaker Boehner tried to strike a "Grand Bargain" that included tax reform, but talks fell apart.

NEW YORK (CNNMoney) -- Legislators finally approved an eleventh-hour plan to raise the debt ceiling on Tuesday, but one part of the debate was left out of the final draft -- tax reform.

Deficit reduction of up to $2.4 trillion was the centerpiece of the deal to raise the nation's borrowing limit, which passed Congress this week after months of debate. But the deal accomplishes that only through spending cuts, not an increase in tax revenue, as Democrats had pushed for.

According to a CNNMoney survey, most economists wanted some kind of tax reform to be included in the deal -- fewer deductions and loopholes for both individuals and businesses which would allow for lower rates but increase collected revenues.

"Tax policy is absurd on its face, keeping accountants and lawyers and especially lobbyists in gravy," said Gary Rosenberger of research firm EconoPlay.

"What people forget is that if oil companies and hedge fund managers continue to get the breaks that nobody else gets, it ultimately forces property taxes to rise for everyone," he said.

The economists surveyed widely agreed that current tax code is a drag on economic growth, because it gives advantages to certain portions of the economy, rather than letting market forces determine winners and losers. And eliminating or limiting deductions and credits and would also allow for a lower tax rate which could boost business activity.

"A flatter tax system with fewer special tax incentives or subsidies for various interests and a lower overall rate structure would enhance economic efficiency and potentially growth," said Lynn Reaser, economics professor at Point Loma Nazarene University.

Most conservatives in Congress agree that lowering tax rates could spur economic growth. And the idea is also popular among Democrats, because it would eliminate the loopholes that allow some companies to pay effective tax rates near zero.

Tax reform was a large part of a plan unveiled last year by the President's bi-partisan debt reduction commission headed by Erskin Bowles and Alan Simpson. Fed Chairman Ben Bernanke has also spoken in favor of tax reform in general terms.

And it was discussed by President Obama and Speaker John Boehner last month as part of a so-called "Grand Bargain" that would have also made changes in entitlement spending such as Social Security and Medicare.

When those talks fell apart, President Obama continued to push for some limited changes in the tax code to eliminate some breaks, such as those for corporate jet owners, oil companies and hedge fund managers.

In the end, Republicans refused to support any increase in tax revenue or change in the tax system as part of the debt reduction plan.

But economists doubt that spending cuts alone can produce the savings needed to trim long-term deficits.

"I don't think there can be enough cuts in the major programs to give the cuts in the deficit we need on the coming years," said David Wyss of Brown University.

According to the survey, economists believe the ongoing debt ceiling debate was a drag on economic growth. About a third of those surveyed said they were worried about the economy falling into a double-dip recession without an increase in the government's authority to borrow. To top of page

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