Tax Analysts Blog

Tax Reform Muddle

Posted on Jan 11, 2013

According to many commentators the prospects for tax reform are plummeting (Fiscal Times, Reuters, Politico). Although it is always a good bet to be pessimistic about the chances for tax reform, I'd say these writers are overstating the effects of the fiscal cliff on the prospects for tax reform. Let me explain why.

Here are the forces that will determine the fate of tax reform:

(1) deficit hawks like Simpson and Bowles who advocate tax reform that lowers rates and reduces the deficit;
(2) tax-writing committee chairman Camp and Baucus who will always advocate for major legislation that moves through their committees;
(3) special interests--like the housing industry, the charitable sector, municipal bond dealers--that have everything to lose from tax reform;
(4) multinational corporations that believe tax reform will move them to a territorial system and allow them to repatriate nearly $1.8 trillion in "trapped" foreign profits;
(5) Republicans--like Mitt Romney and Paul Ryan--who want revenue neutral reform that will significantly lower tax rates; and
(6) Democrats-like Chris Van Hollen--who are lukewarm toward reform but will go along if it raises revenue.

What has changed with the fiscal cliff are the last two. Having agreed to tax increases, Republicans are now more insistent than ever that tax reform must be revenue neutral.

The big change is from Democrats-- who have become so adamant on the need for tax increases in addition to the $600 billion raised by the fiscal cliff deal, and who realize additional rate hikes are absolutely impossible--are hell-bent on preserving the most politically feasible loophole closers for raising revenue. They now seem to have no interest at all in tax reform that lowers rates--and without lower rates, there is no reform. Robert Greenstein at the left-leaning Center for Budget and Policy Priorities put it this way:

    We’d like to see tax reform that both cleans up the tax code and raises substantial revenue.  But policymakers should not undertake tax reform that does the former without the latter.  At this juncture, no tax reform at all would be a sounder and more prudent policy than tax reform that is revenue-neutral.

And you can read more about the evils of tax reform from Timothy Noah at the New Republic.

I don't think views like Greenstein's and Noah's views can be sustained by Democrats for long. It is neither good politics nor good policy. The public hears "tax reform" and it thinks "simplification." Especially as April 15 approaches, Democrats do not want to be the party that opposes tax reform. And as much as there may be a need for additional revenue, there is no need to throw tax reform off the train to get there.

For me not that much has changed. Tax reform was never going to happen in 2013 anyway. Tax reform will take about a year to do, and that process will begin in earnest only after Democrats and Republicans have finished their fight on the level of taxes (which they clearly have not). Democrats will never lead on tax reform, but they will potentially go along if Republicans insist on it as part of a "grand bargain."

Read Comments (3)

vivian darkbloomJan 10, 2013

I think that's a pretty accurate and even-handed description of where we now
stand.

I would, however, add the following, if it is not clear enough from Sullivan's
post: "tax reform" is not synonymous for simply raising tax rates or even
revenues, although the latter might well be a beneficial side effect. Nor is
it a synonym for lowering rates and revenues.

When you think about it, policymakers in Washington are holding a lot of
"hostages" and whether something is a "hostage" just depends on one's political
perspective. From one perspective, tax reform is just as much a hostage as the
debt limit. It's all part of the give and take called politics. As often
remarked, it's a lot like making sausages (and *these* sausages have a lot of
pork). I think we're going to be hearing that word "hostage quite a bit in the
coming months. But, just keep in mind that it's one of those rhetorical
political words like "loophole".

Nick the NoviceJan 10, 2013

Interesting observations. $1.8T may underestimate the amount of foreign profits
'locked out' and awaiting another s965 holiday. Didn't the Chamber recently say
it was more like $4T?

Meir KJan 20, 2013

What is Mr Sullivan's position regarding a switch to a Progressive
Comprehensive Consumption Tax? Disregarding the political feasibility of the
switch, would it achieve our fiscal goals?

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