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Saturday, January 29, 2011

Bartlett: Obama Walked Into Tax Reform Neutrality Trap

Bruce Bartlett (The Fiscal Times), Tax Reform: Obama is Walking into the Neutrality Trap:

In his State of the Union address, President Obama called on Congress to enact tax reform.  Republicans all applauded because to them tax reform is just another excuse to cut taxes. However, their response was muted when he said that any tax reform legislation must be paid for by getting rid of loopholes and cutting spending through the tax code.

No one denies that there are many aspects of the tax code desperately in need of reform. The problem is that Republicans refuse to talk about anything except further cutting tax rates. But the idea of tax reform has always meant much more than that. It also means getting rid of tax preferences that bias individual and business behavior in ways that may not be optimal for them or the economy. In other cases, tax preferences simply waste money subsidizing people and businesses for no reason except that they belong to some politically favored group.

A key goal of tax reform must be to rid the tax code of unjustified tax preferences. The goal, which Republicans used to believe in, should be to achieve tax neutrality. This basically means that people and businesses should make economic decisions based solely on the economics and not because the tax system in effect subsidizes them to do one thing rather than another. ...

Republicans claim they are for it, but they steadfastly refuse to name a single existing tax provision that is worth getting rid of; they are only for tax rate cuts and that is the sum total of their contribution to the tax reform debate. Their rationale, apparently, is that eliminating any tax loophole, no matter how egregious or unjustified, would constitute a tax increase; and they are against all tax increases, period.

The other factor in Republicans’ thinking is just cynical politics – they are for the sugar of rate cuts, but it is the sole responsibility of Democrats to come up with the medicine of actually reforming the tax code by proposing revenue offsets to pay for the rate cuts. Grover Norquist, president of Americans for Tax Reform and the man who, more than anyone else, lays down the Republican line on all tax issues, told me this when I asked him about coming up with offsets to pay for tax reform: “I recommend taking the corporate rate to 25%. The Dems can suggest tax hikes if they believe they need to ‘make up’ revenue. That is a bipartisan division of labor.”

The political trap is obvious. Any actual reform that would increase revenue will be relentlessly attacked by Republicans as a tax increase and they will quickly send out fundraising letters to whatever group or industry is affected, requesting campaign donations to prevent the Democrats from raising their taxes. No mention will be made by Republicans of the idea that the reforms would be coupled with tax rate reductions in a revenue-neutral manner that neither raises nor lowers net tax revenue in the aggregate. Unfortunately, this strategy will doom any hope of tax reform. No Democrat is going to put forward any revenue-raisers under these circumstances. ...

I am not holding my breath waiting for the first responsible Republican to do what Reagan, Kemp, Kasten and others did in the 1980s and put together a tax package that includes specific revenue raisers to pay for further rate cuts. And pie-in-the-sky reforms that would abolish every tax preference in exchange for a flat rate don’t count because there is not the slightest chance such a radical change will ever be enacted. The best we can hope for is incremental improvement along the lines of the Tax Reform Act of 1986, which was a truly bipartisan effort. But that’s not going to happen if Republicans insist on playing by Norquist’s rules.

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I think this view (Bartlett's) is a rather jaded partisan view of tax reform issues. And with a little Tea Party infusion, perhaps more inaccurate now than it would have previously been. Seems to me that flat-tax proponents (none of which are likely Democrats) could support quite a bit of loophole closing.

Allowing deductions of any kind has allowed a multitude of unintended consequences, such as giving local governments freedom to raise local property and income taxes with impunity, creating a transfer of federal tax revenue to state or local ones. (The taxpayer just deducts the local tax, paying less at the federal level.) Allowing home mortgage interest deduction subsidizes the housing markets. Giving businesses a deduction for providing health insurance is a big one, and has arguably distorted the whole health insurance market in favor of big businesses at the cost of hurting the self-employed and small businesses with no market leverage.

Bartlett is just making excuses for why the Democrats don't have the guts to tackle this issue at all.

Posted by: ruralcounsel | Jan 29, 2011 11:57:26 AM

>A key goal of tax reform must be to rid the tax code of unjustified tax preferences.

Every tax preference has some justification behind it. Some are justifiable as improving measurement of disposable income, some as taxing consumption rather than current income, some as directing resources toward government-promoted investments, some as offering relief to lower income people. There are some poorly justified tax breaks, but they are a small minority of the total.

It's simply not true that the tax code contains hundreds of billions of dollars of pointless tax breaks that could be painlessly repealed. That scenario is a fantasy of those who hope to avoid painful cuts in the level of benefits that the government has promised to the middle class, forgetting that the same middle class who will be paying for those benefits.

Posted by: AMTbuff | Jan 29, 2011 1:48:53 PM

Well, we've advance somewhat, it used to be that "Jews" or "Communists" were to blame for everything, now it is simply "Republicans" . . .

Posted by: mike livingston | Jan 29, 2011 3:04:29 PM

"No mention will be made by Republicans of the idea that the reforms would be coupled with tax rate reductions in a revenue-neutral manner that neither raises nor lowers net tax revenue in the aggregate." Well, maybe, but I haven't noticed any Democrats suggesting that either. Nothing is stopping the President from proposing a reform that would eliminate deductions and widen the tax base while lowering overall rates.

Posted by: Douglas B. Levene | Jan 30, 2011 9:38:02 PM

Taxes and entitlements are just opposite sides of the coin of redistribution of income. they'll both need to be reformed. What do you think of this, perfesser?


1. All persons residing in the U.S. shall come together in households for the purpose of reporting all income from any source, each item to be identified by payer's and payee's tax number, and for receipt of federal and state benefits. Members of a household need not be related, need not reside together, and a household may consist of as few as one person.
2. Each year congress shall set by legislation a "minimum wage" and a "tax rate".
3. The following income shall not be subject to taxation:
• An amount equal to a year's earnings at the minimum wage rate, for each adult (age 20-65) member of the household, decreasing 10% per year to 50% at age 15, and increasing 10% per year to 150% at age 70.
• All payments for what is classified as necessary health care for all members of the household including medical care, any pharmaceuticals prescribed by a recognized health care professional, vision and hearing aids, and membership fees for health-enhancing entities such as gyms or other exercise facilities. Health care insurance premiums may be deducted but not health care expense paid for by such insurance.
• All educational expenses including day care for young children or legally incompetent persons, that portion of state and local taxes identified as spent on education, that portion of parochial school tuition, fees and other expenses identified as going for non-sectarian education, tuition, fees and educational materials for private school education at any level, and a per-diem allowance for students traveling more than 50 miles from primary residence for education.
• All income saved into an identified account from which investments may be made. All withdrawals from this account for the benefit of any member of the household shall be reported as income to that member.
4. The "tax rate" shall be applied to any income over and above the deductions listed above, regardless of amount.
5. For households whose deductions exceed total income, the Federal Government shall make payment equal to the tax rate multiplied by the shortfall in income, as shall municipalities and states.
6. There shall be no federal tax on corporations or other business entities.
7. The Office of Management and Budget shall compute revenues to be expected using the newly set tax rate and minimum wage, applied to the previous year's reported incomes. No expenses in excess of that amount may be authorized or made by the federal government without approval by 75% of each house of Congress.
8. At the request, by legislation duly enacted by a municipality having greater than 100,000 inhabitants or a state, a surtax may be imposed on citizens of that municipality or state which shall be applied in a manner exactly as applied for the Federal tax.

Your suggestions sincerely requested. E-mail them to

Posted by: Tom Beebe, St Louis | Jan 31, 2011 1:32:26 PM

I introduced the concept of "households" to make all persons equal under tax law
I suggest review by congress each year of the rate and the minimum wage (which sets the personal exemption)
I set different rates for youth, to ease them into the workforce (graduated minimum wage) and for seniors to ease their increasing need for protected income as they retire
I exempted broadly health care, education and saving (much of which would go to investment) as the three things that contribute to growth of production, thus of income base, thus of government revenue, to pay for government's legitimate obligations without increasing the rate
yes, this is a flat tax, but on disposable income
This is the negative income tax, first proposed by Daniel Patrick Moynihan
Time to make American corporations competitive in the flat world markets
A mild contribution to paying down debt when the economy expands, and a small deficit to stimulate the economy when it constricts
Our states and cities need means to raise revenue, and the cost of living, and of government services, varies from place to place

Pretty good, for just one page, what?

Posted by: Tom Beebe, St Louis | Jan 31, 2011 2:08:42 PM

If there is no corporate tax, what good would special interest corporate tax breaks do?

Posted by: Tom Beebe, St Louis | Jan 31, 2011 2:50:43 PM