Tax Analysts Blog

Is There a Tax Reform Consensus?

Posted on Nov 16, 2012

Is tax reform simple? In an article for the Wall Street Journal, Gerald Seib suggests that maybe it is, at least in theory:

    The broad outlines of what needs to be done are pretty well known. There is even something of a consensus. Serious thinkers in both parties would agree that rates should be lower and flatter, but with fewer exemptions and loopholes. The corporate rate should be lower but more fairly enforced.
On balance, this is a fair summation of opinion in the tax community. But I'm not sure it even approximates a fair reading of opinion in the political community -- where it ultimately counts. In general, tax experts are big fans of lowering rates and broadening the tax base, on the theory that such reforms can reduce distortions while still raising adequate revenue.

But many political experts -- at least on the left -- are unmoved by such arguments. In their mind, the biggest challenge facing the nation is not narrowly fiscal but broadly social and economic. Hence all the complaints about jumping the gun on deficit reduction. The big problem, for many liberals, is not the long term fiscal gap but the short term employment picture. As Paul Krugman writes:
    Contrary to the way it’s often portrayed, the looming prospect of spending cuts and tax increases isn’t a fiscal crisis. It is, instead, a political crisis brought on by the G.O.P.’s attempt to take the economy hostage. And just to be clear, the danger for next year is not that the deficit will be too large but that it will be too small, and hence plunge America back into recession.

Many tax experts, of course, agree with this assessment, even as they argue for long term fiscal reform. But on the left, reform seems too dangerous in these precarious economic circumstances, at least when it's defined in terms of fiscal consolidation. The mantra of reform is also prone to misuse, liberals argue, with conservatives using it as a thinly veiled excuse for dismantling the modern welfare state.

If your main concern is closing the fiscal gap and making the tax system more growth-friendly, then revenue raising solutions that don't involve higher rates are a good thing. But if your principal worry is, say, inequality or economic insecurity, then higher rates aren't just tolerable, they're actively desirable. Not only do higher rates promise to raise revenue, but they also send a message. As Robert Borosage of the Campaign for America's Future writes:
    You would think that any discussion of reducing deficits would begin with the assumption that there must be higher tax rates on millionaires and billionaires. You would be wrong.

For liberals, high rates promise to ameliorate inequality. Economists may raise doubts about the efficacy of higher rates in achieving that goal. But it seems fair to say -- as liberals often do -- that lowering rates isn't likely to help.

Which is why I'm a pessimist about tax reform, whether individual or corporate. I simply don't believe that Democrats, as a party, are really on board with lower rates. And I'm fairly certain that Republicans aren't on board for much in the way of additional revenue, even if it can be raised without higher marginal rates.

In other words, I don't think any sort of deduction cap is going to make the political problem go away. Not to mention that it brings it's own problems, as my colleague Marty Sullivan has pointed out, Such a reform, he notes, would:
    substitute explicit tax rate increases for hidden marginal rate increases. Marginal rates are hard to calculate and hidden from the public but whether they are hidden or advertised they are the critical features of the tax system that matter for work effort and job creation.

A consensus on tax reform? Not in the political world. And maybe not even among tax experts, if Marty is any indication.

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