Saturday, January 29, 2011
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.
- Bruce Bartlett, The Roots of Tax Reform, Part I (1960-1979), 129 Tax Notes (Dec. 20, 2010)
- Bruce Bartlett, The Roots of Tax Reform, Part I (1980-2011), 130 Tax Notes (Jan. 24, 2011)