Tax Analysts Blog

Tax Reform Fantasy

Posted on Nov 18, 2010

The most difficult thing to understand about the President's deficit reduction commission is its love affair with tax reform. Under one proposal it would cut $1.1 trillion in tax expenditures, but only $80 billion of that would be for deficit reduction. So, less than 10 percent of the revenue for base broadening would be used to achieve the goal which is the sole purpose of its existence. Of course, you will not find bigger supporters of broadening the base and lowering the rates than the folks I work with at Tax Analysts. We welcome the effort. But, really, what does tax reform have to do with deficit reduction?

Tax reform is one of the most arduous tasks Congress could ever undertake. So is massive deficit reduction. What is it that makes people think that doing both simultaneously will make everything easier? On top of all that, consider the fact that this is not 1986 or even 1996: the 112th Congress is widely expected to be one of the most dysfunctional in history.

There are a few half-baked theories about why tax reform and deficit reduction should be joined. According to one view, often voiced by Senator Weyden in support of his tax reform plan, we should strengthen the tax system to improve economic growth, and economic growth in turn will reduce the pain of deficit reduction. Another argument is that by adding tax reform to deficit reduction, politicians have more bargaining chips to make deals, and ultimately on the table tax reform can sweeten the bitter pill of deficit reduction. Yet another is simpler still: while we are doing a major overhaul of our finances we might as well get cracking on revenue reform. It like’s your mechanic saying, while we are overhauling your engine, we might as well go ahead and replace your transmission.

Properly marketed, each of these approaches might have some ephemeral appeal. But the arguments are paper thin and wholesale clean up of our fiscal mess is going to be a long and drawn out process. Nobody is going to pull a fast one. Sure, folks would welcome lower rates and a simpler code. That makes deficit reduction seem downright pleasant. These aspects of tax reform are getting all the attention now. But that won’t stay that way for long—especially once the influence industry gets its machinery in full gear. Congress will come to realize that tax reform will make its job more difficult not less.

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