Introduction

Americans are increasingly frustrated with the complexity of the tax code and their belief that wealthy individuals and corporations are gaming the system. Their frustrations are well founded, given that Congress and the president add scores of new tax loopholes for special interests each year. Last year alone, 10,000 pages of new tax breaks were inserted into the code. But, while there are myriad tax loopholes available for those who can afford well-connected lobbyists, the broader fault with our system of taxation is that its complexity imposes enormous compliance costs on both individuals and businesses. In fact, the U.S. Department of the Treasury has estimated that the total cost of tax compliance in the United States is roughly $115 billion per year, partly because more than one-half of all individual taxpayers now use paid preparers to help them with the arduous chore of filing.

Meanwhile, the Bush administration has enacted a series of tax cuts that have not only riddled the code with new loopholes, but have also made the system less progressive. The middle-class share of the tax burden has risen, while the wealthiest Americans' share has dropped. Today, typical middle-class families can pay income tax rates of up to 25 percent, plus another 7.65 percent in payroll taxes. Yet corporate executives can sell millions of dollars in stocks and pay a capital gains tax of just 15 percent.

This bias in favor of wealth and entrenched privilege, rather than work and the basic ethic of fairness, is wrong on both economic and moral grounds. But it gives progressives a political opening. They should champion a bold set of reforms that would tip the scales back in the other direction -- harnessing the tax code as an instrument to expand middle-class opportunity. Specifically, they should propose eliminating special-interest loopholes, cutting corporate welfare, and expanding the tax incentives that encourage the most basic aspirations of families trying to live the American dream: The incentives that make it easier to pay for college, buy a first home, raise children, and save for retirement.

The case for that kind of reform is abundantly clear. The administration's tax policies are bankrupting future generations for the short-term benefit of those who need it the least today. Yet it shows no sign of letting up. In fact, after four years of sweet offerings for high earners, the administration is pushing for yet another round of cuts that would treat wealthy Americans to tax-free investment income and lower taxes on all other income -- measures that would further exacerbate the government's ballooning budget deficits. A glaring case in point is the administration's plan to eliminate all existing IRAs and replace them with savings accounts that grow tax free, creating a significant tax shelter for wealthy Americans. The plan is a classic bait-and-switch tactic that uses the idea of simplicity to accomplish a shift in the overall tax burden -- in the wrong direction.