It’s easy to be cynical about tax reform. Politicians tell us that fixing the tax system is imperative and essential. But comprehensive reform is unusual and durable changes rarer still. That’s not exactly a recipe for optimism.
“For longtime tax observers, it is hard not to have a jaundiced view,” observed former Senate Finance staff director James C. Gould in a recent piece for Tax Notes. “Why will 2015 be any different from the last quarter-century, especially given the increasing political polarization in Washington?”
It’s a good question. And Gould offers the beginning of an answer:
Among the lessons of the many failed tax reform attempts of the last three decades are that tax reform
will not come from a commission; it will not result from a bill drafted by a committee chair behind closed
doors; it will not be a flat tax; it will not be a consumption tax as a replacement for the income tax; and
it will not succeed through dynamic scoring. Rather, tax reform will result from the establishment of a fully
bipartisan architecture for the bill at the outset. It will result from a transparent, flexible, and bipartisan bill
drafting process; from strategic use of congressional staff to test the waters of controversial proposals; from
skillful deployment of transition rules and other minor bill changes to win support from rank-and-file members
of Congress; and from streamlined or fast-track debate procedures. And it will benefit from a war room mentality
by the bill's managers in the Senate and the House.
Gould stops short of predicting success for would-be tax reformers. But other observers are less restrained. Mark Bloomfield, president of the American Council for Capital Formation, recently made the case for optimism, at least regarding corporate reform. While acknowledging all the hurdles, he insists that lawmakers should be able to clear them. “There is probably enough common ground for compromise,” he wrote.
Bloomfield isn’t the only cockeyed optimist handicapping corporate reform this winter. Ed Kleinbard, USC law professor and former chief of staff for the Joint Committee on Taxation, is also feeling hopeful. “A rough framework is emerging that could stun pundits by actually becoming the basis of corporate tax reform legislation,” he contends in a recent essay. “In short, and contrary to many claims, corporate-only tax reform, properly constructed, is feasible.”
Kleinbard’s case for optimism hinges on several assumptions and preconditions, including a certain tolerance for losing revenue. He also sketches out some promising solutions to difficult problems, including the tax treatment of passthrough entities (like partnerships, S corporations, and LLCs), whose incomes are taxed at the individual, not the business, level. Corporate-only tax reform would bring few benefits (and probably some new costs) to the owners of these businesses. Kleinbard would solve that problem by encouraging passthroughs to incorporate.
But the happy, beating heart of Kleinbard’s argument concerns international taxation. Where many people see an obstacle, Kleinbard sees an opportunity. Obama’s plan for revamping international tax design – widely scorned by the business community when it was released earlier this month – actually looks a bit Republican. “In fact, its basic terms – low domestic corporate rate, territorial taxation, one-time transition tax, and a targeted minimum tax or other antiabuse rule – are consonant with earlier Republican workproducts,” he writes.
I wish I could say I shared Kleinbard’s happy thoughts. Obama’s plan may look a bit like Dave Camp’s tax reform plan from 2014 (in general if not specific terms). But given the reception that Camp’s plan got from his fellow Republicans, I’m not sure that family resemblance is really cause for optimism.
But again, cynicism is cheap. At the very least, Kleinbard has outlined a plausible path to reform.
And that ain’t nothin’, in these gridlocked days.