Some folks are getting excited about tax reform. The sweeping Wyden-Gregg plan is getting attention. And there are a reports (for example, here and here) that the President's deficit reduction commission could propose cutting back prominent middle class tax benefits--like the mortgage interest deduction and the exclusion for employer-provided health insurance. Well, don't hold your breath. The landmark, but less ambitious, Tax Reform Act of 1986 just barely made it through Congress at a time when Republicans like Reagan and Democrats like Rostenkowsi could work together. And the pain of cuts to tax expenditures was blunted with large cuts in tax rates.
In current circumstances it would be ludicrous to engage in a major tax reform effort without raising revenue. Lack of bipartisanship and the need for deficit reduction make it a safe bet that getting rid of beloved middle-class tax breaks is not doable.
Tax reform would provide a pro-growth foundation for the tough fiscal times that lie ahead. Unfortunately, politics is more likely to drive us in the other direction. The key to understanding how this could happen is to recognize Republicans' absolute confusion about targeted tax cuts. Republicans' love affair with all tax cuts has made them blind to some of their flaws.
President Clinton took advantage of this. Instead of enlarging government (as it is conventionally measured) with more government grants for college education, the Clinton administration engineered the creation of a monstrously complex pair of tax credits for college expenses. Republicans saw tax cut and couldn't resist, even though it was a fundamental violation of their anti-big-government ideology.
In moments of clarity, many conservatives understand this point and resist temptation. Folks over at the Cato Institute get it. And in today's Washington Post we get a snippet of pro-tax reform talk from--of all people--the next Speaker of the House, John Boehner:
- Boehner . . . has embraced the possibility of higher taxes, suggesting in a speech in Cleveland this summer that lawmakers should look at clearing out the "undergrowth of deductions, credits, and special carve-outs" in the tax code that are little more than "poorly disguised spending programs."
If there is going to be any bipartisanship by the incoming 112th Congress and the White House, one place you could find it is in the expansion of targeted tax cuts. And forget about Wyden-Gregg, Reagan-Rostenkowski style tax reform. Any reduction in tax breaks is a backdoor tax increase that would muddle the conservative message and the Republican brand.