Tax Analysts Blog

In Defense of Tax Reform Fantasies

Posted on Nov 24, 2010

My colleague Marty Sullivan is unconvinced by recent arguments for pairing deficit reduction with tax reform. "Tax reform is one of the most arduous tasks Congress could ever undertake," he points out. "So is massive deficit reduction. What is it that makes people think that doing both simultaneously will make everything easier?"

It's a good question, but one with a reasonable answer. History suggests that such a pairing may be our only hope for raising taxes to meet the nation's fiscal crisis.

Politicians -- or at least American politicians -- have never been good at asking voters for sacrifice. In fact, pretty much the only time they've mustered the courage has been during wartime. There have been exceptions to this rule: the 1980s and early 1990s did, in fact, bring some "revenue enhancements" designed to shrink the deficit. But these were notably smaller hikes than the ones we'll need to solve our long-term budget problems.

It's quite possible that some sort of non-war crisis could also prod reluctant pols to do their job (including both raising taxes and cutting spending). But that sort of crisis will be deeply unpleasant. Do we really want to wait this out, counting on a bond market meltdown to shake loose our fiscal logjam? Aren't there better ways of moving the process forward?

As I argued recently in an article for Tax Notes magazine, I think tax reform might be the answer. The Tax Reform Act of 1986 demonstrated that base broadening coupled with rate reductions can find a political constituency, both in Washington and around the country. To be sure, that landmark law unfolded under the rubric of deficit neutrality, which certainly made the job easier. But there's no inherent reason why the fundamental bargain of trading loopholes for lower rates can't be made to raise money, too. It's inherent fairness might reassure dubious voters that necessary tax hikes were at least being built on a sound framework.

Look, I'm not saying it's a gimme. I still think it will take a catastrophe to force real action on the nation's fiscal future. But I'm unwilling to toss in the towel (at least right now), so you count a fan of fiscal fantasy.

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