Tax Analysts Blog

Democrats and Tax Reform: Can't Do It With 'Em, Can't Do It Without 'Em

Posted on Feb 26, 2014

If you’re a Democrat, there’s a lot to like in House Ways and Means Chair Dave Camp’s tax reform bill.

According to early reports, the legislation includes a special surtax on wealthy taxpayers, as well as a new tax on large banks and insurance companies. Camp himself has promised that the bill will also “clean up” the tax preference for carried interest, which implies another big tax hit for Wall Street.

And that’s just the punitive stuff. Liberals will also like Camp’s promise to increase the standard deduction and the child credit. Ditto his plan to simplify tax breaks for higher education.

If you’re a left-leaning populist, what’s not to like?

Well, at least one big thing: The bill doesn't raise taxes.

Camp considers this a feature, not a bug. “The tax code changes in my plan are not intended as a means of raising revenue,” he promised in a Wall Street Journal op-ed. “If loopholes are closed, Americans should get the benefit by way of lower rates.”

Camp insists that his tax reform plan will raise new revenue -- eventually. By encouraging economic growth, it will expand the economic pie, including the slice taken by the tax man.

But that’s not enough for Democrats, who want higher taxes (and additional revenue) right now. Worried by long-term fiscal projections, they want higher taxes now to avoid entitlement cuts in the future.

Camp's failure to raise revenue in the short run is bad enough. But for Democrats, his bill would do something even worse: It would use up all the good revenue raisers and devote the money entirely to rate reduction. That would make real tax hikes much harder in the future.

This conflict lies at the heart of the tax reform impasse. As my colleague Clint Stretch has pointed out:

    Conservatives might give up an important tax incentive to lower rates and hold government spending in check. They won’t agree if it means a tax increase. Democrats won’t give up important benefits for their constituents merely to lower rates, because it would mean accepting deeper spending cuts affecting those same constituents as well.
This conflict is not easily finessed. But reaching some sort of compromise is necessary, at least if you insist on holding out hope for tax reform. Because Republicans are simply incapable of doing this on their own.

Here's the problem: The only way Camp could get a bill out of his committee was to exclude Democrats from the drafting process, but the only way he can get it out of the House is by convincing Democrats to carry the water for curbing tax preferences.

Republicans are simply not capable of eliminating tax breaks, even if the money is devoted to rate reduction. Witness the GOP handwringing over Camp's plan -- worrying that started even before details began to leak over the past few days.

As a caucus, Republicans are simply incapable of raising taxes on anyone -- even in the interest of revenue-neutral tax reform. As a party, the GOP is so deeply antitax that it can't get behind any meaningful revenue raiser.

As a result, Republicans need Democrats to make the case for curbing tax preferences. That way, GOP lawmakers can trumpet rate reductions and claim to be accepting revenue raisers only under duress.

But today's Democrats aren't willing to offer that sort of help. That's why 1986-style tax reform -- defined chiefly by its revenue neutrality -- is simply impossible in 2014.

The two parties are divided by an unbridgeable chasm over the size of government. Until voters provide a little more clarity (by giving one party a workable governing majority), we won't see any sort of real tax reform.

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