Tax Analysts Blog

A Proposal to Get Tax Reform Back on Track

Posted on Feb 18, 2013
By closing some additional loopholes through tax reform — which Speaker Boehner has acknowledged can raise money in a sensible way — and by doing some additional cuts . . . we can arrive at a package that gets this thing done.

--President Obama, Jan. 14

The President got his tax increases last year. He got those higher revenues. He was able to tax higher income individuals. But taking tax loopholes, what we've always advocated is necessary for tax reform, means you're going to close loopholes to fuel more spending not to reform the tax code.
-Rep. Paul Ryan, House Budget Committee Chairman, Feb. 17


For the last half decade tax reform has been afloat in a sea of political turmoil. The Financial Crisis, the Great Recession, and the ensuing series of budget dramas have jostled it forward and back—both helping and hurting the cause. But its success is still a distant possibility because ultimately tax-reform must be a bipartisan effort. Right now, official Washington cannot see past its partisan differences.

The basic problem is that Republicans want to use the revenue from limiting tax breaks to cut tax rates. Democrats want to limit tax breaks to raise revenue. And in the aftermath of the election and the Republicans’ concession on tax hikes for the wealthy, both sides seem to have dug in more deeply.

The way they talk! You’d think tax loopholes were ripe fruit on a tree that just needs a little shaking. What both sides are glossing over is that publicly identifying and then building legislative majorities for limits on tax benefits is one of Washington’s most difficult political exercises. Don’t forget, that trillion dollar pile of tax expenditures that reformers are always talking about is made up mostly of popular, firmly-entrenched tax benefits. They are only “loopholes” in the abstract.

Before earmarking what we will do with the money from limits on chimerical loopholes, our leaders need to clear the path for the painful process of broadening the tax base. President Obama has now poisoned the well by turning Republicans’ tax reform instincts against them. If they were to put any revenue increases on the table, the President would claim the proposals have the Republican seal of approval and incorporate them into his tax hike plans.

At the same time Republicans tax reform strategy is wearing thin. Their extravagant claims about cutting the top individual rates below 30 percent are just hollow speechifying as long as they refuse to put specific revenue-raisers on the table.

If rate-reducing tax reform is ever going to go anywhere, Republicans need to motivate the President. If further tax increases are ever going to materialize, the President needs Republican approval. Though real base-broadening ideas are critical to success of either effort, leadership along these lines right now is at best a thankless task.

Congress and the President need to improve the political incentives for the hard work of limiting tax breaks. To this end, they should put the congressional tax-writing committees to work on proposals to limit tax breaks and agree in advance that any revenues raised from their effort will be split 50-50, one half for deficit reduction and one half for rate reduction.

If our leaders could agree to this compromise the debate about tax reform could move beyond the vagaries of partisan politics—which is achieving nothing--and get down to brass tacks of solving technical problems and working out compromises with special interests. In the end, these are the “details” that will make all the difference.

Read Comments (3)

amt buffFeb 18, 2013

Republicans are unlikely to agree to that deal unless the revenue baseline
excludes the recent tax increase. That's why pundits say that the tax increase
killed the prospects for tax reform.

Democrats forced their tax increase and now they want to split the difference
on a new deal? I can't think of any negotiation in which such a tactic has
succeeded. The party which lost Round 1 always wants some payback in Round 2.

Bush forced his tax cuts and Democrats never gave him anything after that.
That's what happens whenever you steamroll the other party.

edmund dantesFeb 18, 2013

Patience, please. Consider the long game. The single most important tax reform
item is eliminating the exclusion for employer-paid medical insurance. Too many
people benefit from this "loophole" today for it to be altered. Just give
Obamacare a few years, employers will start dropping their health care plans in
droves. Then most people will be buying their insurance with after tax
dollars. At that point, treating employer health care insurance payments as
income, as they should be, will become a fairness issue and will be politically
easier.

von gneisenauFeb 24, 2013

As the pie becomes smaller and smaller and the mouths grow hungrier and
hungrier, the noose becomes ever so tighter. Soon PRC coffers will be paying
for the Seventh Fleet salaries direcly.

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