Monday, December 10, 2012
The story behind the story is that “tax reform,” as we know it, is dying. During the 1980s, no major piece of legislation better symbolized bipartisan consensus than the Tax Reform Act of 1986, which was regarded by both liberal and conservative experts as the best tax law since World War II. The basic idea was simple: Reduce tax rates and recover lost revenue by ending (or limiting) tax breaks. The struggle between President Obama and House Speaker John Boehner over the “fiscal cliff” indicates that this beneficial consensus has collapsed.
Just the opposite is occurring. President Obama insists not only that the rich pay more in taxes (a legitimate demand) but also that their tax rates go up (questionable). This turns traditional tax “reform” on its head. Boehner says the added revenues should come through closing loopholes. The two also disagree on the amount of tax increases: Boehner has offered $800 billion over a decade, about half of what Obama wants. But this difference is amendable to negotiation; the rates-versus-loopholes dispute is less so.
For Obama, the obsession with raising top rates (from today’s 33% and 35% to 36% and 39.6%) seems an exercise in political symbolism. He wants to be seen as vanquishing the rich — and Republicans. Otherwise, why not accept Boehner’s means (loophole closing) to achieve his policy ends (higher taxes on the rich)? ...
The lower rates and broadened tax base of the 1986 law had explicit goals: to increase economic growth; to reduce the use of taxes to promote some activities and discourage others; to minimize lobbying for tax breaks; and to make the system simpler. With time, the appeal of these goals has faded. ...
[M]any politicians support tax breaks for favored groups (the elderly, the poor, small business) and causes (homeownership, attending college, “green” industries). This enhances their power. The man who really pronounced the death sentence for the Tax Reform Act of 1986 was Bill Clinton, who increased the top rate to 39.6% rather than broadening the base. As the top rate rose, so did the value of generating new tax breaks. Ironically, many of the people who complain the loudest about Washington influence-peddling and lobbying are the same people who support higher tax rates, which stimulate more influence-peddling and lobbying.