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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, December 10, 2012

Samuelson: The Death of Tax Reform

Washington Post op-ed:  The Death of Tax Reform, by Robert J. Samuelson:

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.

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Limits on deductions is mostly a tax on the upper middle class. An increase in marginal rates is mostly a tax on the rich. Hardly "symbolic"

A limitation on deductions which is what they are talking about, creates huge marriage penalty issues
so its not true that deduction limitation automatically constitutes tax reform.

Samuelson is a dues paying economist, who should know better, so I have to think he is being disingenuous

Posted by: jimharper | Dec 10, 2012 2:34:15 PM

Insisting the "rich" pay more is NOT a legitimate demand. It is the arrogance of a puffed up president who cares only about dividing people in this country and vanquishing his enemies, as he has called them. It generates a very small amount of revenue, and could cost between 200,000 and 700,000 jobs. Thus, his proposed stimulus plan. We need leadership who will work together for the good of the American people, not just a select group by taking money out of the economy and giving it to people and programs where it will be riddled with waste and fraud. Such a shame.

Posted by: Linda C. | Dec 11, 2012 1:58:27 AM

If I remember correctly it was Clinton, not Reagan or Bush, who left a surplus in the economy. Why is higher rates so "bad"? for those in the AMT it probably will not matter. These "loopholes" he talks about probably effect the middle class much more than the wealthy (there is already limits on mortgage interest for high earners). Reagan was the purveyor of the false belief that cutting taxes will balance the budget...the myth of supply side economics. Put down the rose tinted glasses and get back to basics. Cut spending and raise taxes. Deficit will be gone. Unless that is not the real goal.

Posted by: George W | Dec 11, 2012 11:55:54 AM

I would be happy to go back to Clinton level taxes, but only if we also go back to Clinton level spending. Most if not all of the benefits that you attribute to Bill Clinton were only realized after the Republicans took over the legislature and Clinton moderated his positions. Thus we got "Welfare Reform" which helped with deficits (and Obama is trying his hardest to undo). Also, look up the Contract with America. If the Republicans had been able to pass the best of those provisions we would probably not be in the mess we are now. One of them alone could have saved us untold trillions over the last 20+ years: zero baseline budgeting.

Posted by: BruceC | Dec 11, 2012 6:38:17 PM

I can't tell if Obama is a idiot or liar when it comes to taxes. What's the point of limiting deductions when deduction phaseouts come back in 2013? After you've lost 80% of your deductions and all of your personal exemption because of the phaseout, doing things like limiting the tax rate of your deductions is almost meaningless.

Posted by: Bob Smith | Dec 11, 2012 8:31:16 PM

The limitation on deductions is a Republican idea. It was promoted by Governor Romney during the campaign. About 25% of the national income is in the upper middle class. So that's the last big reservoir to tap to protect the extra-low capital gains rates.

Posted by: jimharper | Dec 12, 2012 6:22:39 AM