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That Old Tax Magic

WASHINGTON, DC – Tax time in the United States – the dreaded mid-April deadline for filing annual income-tax forms – has come and gone. The system, Americans have been reminded, has become painfully complex, with many a loophole through which one might try to squeeze. The fear of an audit by the Internal Revenue Service lurks in homes across the country.

At such a sensitive time, it is no surprise to hear politicians pitching the idea of “tax reform” – suggesting that they can simplify the system, close loopholes, and use the proceeds to reduce tax rates. The allure of such appeals is that a crackdown on others’ tax avoidance will mean that you personally will pay less in taxes.

In the policy jargon increasingly heard in today’s political discourse, tax reform will be “revenue neutral” – meaning that it will not worsen the budget deficit or drive up the national debt. The broader subliminal message is that you can have whatever you currently expect in terms of government services for less than it costs you now.

The problem with this vision of tax reform is that it is magical – an attractive illusion with no basis in reality. Consider the recent pronouncements of Mitt Romney – now the presumptive Republican candidate to challenge President Barack Obama in November. Romney wants to cut tax rates, mainly benefiting those at the upper end of the income distribution. He also wants to close loopholes, but none of the details that he has offered add up to much. His boldest proposal – eliminating deductions for interest paid on mortgages on second homes – is trivial in terms of generating revenue.