Tax Analysts Blog

Do Progressives Hate Tax Reform?

Posted on Jan 21, 2016

Everyone likes tax reform. Except liberals, of course. And conservatives, too.

“The traditional approach to tax reform is to make the tax code fairer and more respectful of taxpayer economic values,” intoned GOP luminary Douglas Holtz-Eakin in a recent piece for The Huffington Post.“Progressives can't do tax reform because they don't really believe in either.”

Holtz-Eakin actually has a point. But it’s not the one he’s trying to make, which is deeply partisan and more than a little unfair.

Liberals have doubts about "tax reform," at least as that term is usually defined by conservatives, policy wonks, and economists. It’s not because they don’t care about fairness. It’s because they don’t believe that old-fashioned tax reform – in which lawmakers trade lower rates for a reduction in tax preferences – is useful anymore.

Since at least the 1950s, tax reform has been defined by a mantra: lower the rates, and broaden the base. It’s not a bad formula for improving a tax system, especially one plagued by high rates and numerous loopholes or tax preferences. That’s exactly the system Americans had in the decades after World War II.

But it’s not the tax system we have today. In particular, the statutory rates of 2016 – while higher than those of the recent past, especially in the upper brackets – are nothing like the tax rates of 1956. Individual rates are much lower across the board, especially at the top.

Today’s lower rates make old-style tax reform less appealing, at least to liberals, who think rates are plenty low already. But even more importantly, rising inequality has destroyed the bipartisan consensus that once surrounded traditional tax reform.

These days liberals are inclined to favor raising rates on wealthy taxpayers while also eliminating tax preferences. (See, for example, the tax changes offered up by Democratic presidential candidate Bernie Sanders.)

That formula for tax reform isn’t new. But it harks back to the beginning, not the middle, of the 20th century, when raising taxes on the rich was the sine qua non of real reform.

Whether higher taxes would actually do much to stem rising inequality remains a subject of lively debate, even on the left. But lower rates – even when paired with the elimination of tax preferences – seem likely to make matters worse.

That, at least, is the liberal consensus these days.

On the other side of the spectrum, conservatives have their own doubts about the classic formula for tax reform. Sure, the GOP presidential candidates churn out tax reform plans with notable enthusiasm. But why shouldn’t they be excited? After all, their versions of tax reform are a form of tax reduction – often significant tax reduction. Unchecked revenue losses are not part of the traditional reform agenda.

Ultimately, classic tax reform has become a victim of its own ephemeral success – and subsequent failure. The Tax Reform Act of 1986 was far from perfect, but it made good on the lower rates/broader base mantra. Almost immediately, however, both parts of the bargain began to fray; rates began creeping up within a few years, and preferences (never vanquished entirely in the first place) also began to grow. By the mid-1990s, tax reform was starting to look like a disappointment, to both liberals and conservatives.

Today, classic tax reform has little real support outside the wonk community. So it’s fair to say, as Holtz-Eakin does repeatedly, that liberals don’t care about tax reform.

But neither do conservatives.

 

Read Comments (1)

AMTbuffJan 22, 2016

There is one scenario in which tax reform might be politically stable. First,
Democrats need to raise marginal rates to the sky. Then, after a year of
disappointing results, both parties can agree on reducing rates and broadening
the base. The calculation will show this reform to be revenue-neutral even
though it will increase revenue relative to sky-high rates.

The irony is that this round trip to tax reform will put us back very near
where we are today.

Today's tax system may be the worst, except for all the other politically
stable systems.

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