If you listen to the lobbyists, tax reform is always just around the corner. For years, Beltway mavens have been especially vocal about the urgency – and even the inevitability – of corporate reform. With some $2.6 trillion in corporate earnings “trapped,” “stranded,” “stashed,” or simply held overseas, the status quo has long seemed untenable.
And yet, it has proven strangely tenable from one year to the next. Inertia and gridlock have been powerful obstacles, slowing the drive to bring that money home. Even the pairing of repatriation with infrastructure construction– a masterpiece of bipartisan logrolling that seems irresistible in theory – has turned out to be notably resistible in practice.
And then Trump happened. Or more precisely, Trump plus the Republican success in holding the Senate. And now, for the first time in a long time, single-party dominance seems poised to deliver some version of the long-predicted, always “inevitable” tax reform.
At this point, the real question is what the ascendant Republicans mean by “tax reform.” Critics have suggested that they’re really just seeking a giant tax cut, which by most definitions is not true reform.
I disagree. While I may not like it, I think the definition of tax reform – if the phrase is going to mean anything – has to make room for sweeping tax cuts that change the landscape of American politics in a fundamental way. And by that measure, I think the Republicans are talking about a very real kind of tax reform.
Traditionally, tax reform has been a bipartisan, expert-driven affair. This tradition, which I call technocratic tax reform, features a bargain of sorts: Taxpayers get lower rates in exchange for sacrificing some of their cherished tax preferences.
This approach to tax reform has at least one major accomplishment to its credit -- the Tax Reform Act of 1986. And while that landmark legislation is now 30 years old, its fundamental bargain still commands respect from many prominent politicians, including House Ways and Means Chair Kevin Brady.
In a recent interview, Brady lauded his predecessor, Dave Camp, for making tax reform “inevitable” (there’s that word again). How so? “In the sense that he showed you could broaden the base and lower the rates and simplify the code and be competitive around the world and make it more understandable,” Brady told CNBC.
That’s almost charming in its optimism and generosity. And the sentiment has been echoed (at least implicitly) by other GOP leaders when emphasizing the need to limit federal borrowing. “My preference on tax reform is that it be revenue neutral,” declared Senate Majority Leader Mitch McConnell earlier this month.
Still, it’s hard to square that sort of fiscal traditionalism with Trump’s sweeping plans for tax reform, not to mention the House blueprint that Brady has been championing for the last six months. (The revenue loss from the former is uniformly estimated to be something between very large and huge; Brady’s plan looks cheap by comparison but still loses money according to most estimates.)
The real question here is both rhetorical and political: Do any of these GOP plans constitute real tax reform? If we use the technocratic definition (with its emphasis on trading a broader tax base for lower rates), then the answer is probably no.
What if we take a grander view, rooting our definition in historical experience? That approach would define reform in terms of structural change (think 1913 and the creation of a brand-new income tax). In that case, the House blueprint might qualify, since it would replace the current corporate income tax with a novel destination-based cash flow tax. That’s some real change.
But for the sake of argument, I want to suggest that even if next year’s tax legislation abandons the cash flow tax, it may still qualify as tax reform.
If you believe creeping statism is the biggest problem facing America, then revenue-losing tax cuts are a legitimate instrument of both fiscal and political reform. In fact, the more revenue they lose, the more they look like reform.
I suspect that many Republicans view Ronald Reagan’s 1981 tax cut in that light. And as a matter of history, they’re right. Reagan’s first-year tax cuts permanently altered the trajectory of federal fiscal policy, not to mention American politics and governance writ large.
And tax reform has never been the same, either. Rates came down swiftly and dramatically in 1981, and in the decades since, no one has seriously suggested that they return to anything like their pre-Reagan heights. Reagan’s cuts weren’t just a change in degree, they were a change in kind; income taxes today look very different than they did before Reagan changed the conversation.
In other words, Reagan’s claim to tax reform glory hinges not simply on the technocratic achievements of 1986 but also on the supply-side victories of 1981.
Now, lurking inside this definition of tax reform is the discredited notion of starving the beast. As any number of critics have pointed out, the beast of big government has never actually been starved – not even by Republicans who claim to hate it. Indeed, by most measures, the beast has continued to eat quite well.
But absent the Reagan reforms, I think the beast would be bigger. Reagan’s tax cuts didn’t starve big government of the money it needed to survive, but they almost certainly constrained its growth. Even Reagan’s later tax hikes didn’t completely undo the strictures imposed in 1981.
To be clear, Reagan’s tax-cut version of tax reform is not my sort of tax reform. I’m inclined to the old-school tradition, trading rates for base broadening. And if I were looking for something more dramatic and structurally innovative, I’d consider the introduction of a broad-based consumption tax, perhaps using it to replace revenue from the struggling corporate tax.
I support that sort of tax reform because I don’t support the GOP fixation on shrinking government. Indeed, my inclination would be to expand the state, at least in the service of broadly shared economic security.
But that’s just my opinion. And while I cherish it, I don’t think it entitles me to commandeer the moral and rhetorical high ground of “tax reform.” If that contested phrase means anything, it means something simple: a change to the tax system that makes a difference and lasts a long time.
And by that measure, we may be in for some genuine tax reform next year.