Tax Analysts Blog

Twelve Steps to Tax Reform

Posted on Dec 22, 2010

The first five suggestions are crucial for getting conservatives to be the driving force behind tax reform.

(1) Get conservatives to recognize tax expenditures as government spending. Relabel "tax expenditures." Call them "tax earmarks." This first point is absolutely critical. Once conservatives get locked into the notion that cutting tax expenditures is a tax increase the whole process could be doomed. More thoughtful conservatives understand that "big government" can manifest itself in the tax code as well as in appropriations. This concept needs to be hard-wired into conservative principles.
(2) Get conservatives to recognize base broadening as an alternative to a VAT. "Let's do tax reform the American way."
(3) Get corporations to recognize base broadening as the pathway to lower corporate rates and a territorial system.
(4) Get western state senators to recognize base broadening as an alternative to a gas tax. The 15 cent hike in the gas tax suggested by the Bowles-Simpson commission was an immediate turn off to big state senators.
(5) Enlist the support of free-market small-government think tanks with a predilection for a Flat Tax or retail sales tax. Many pure conservatives have been pushing for elimination of deductions and tax credits for years.

The next two suggestions are also critical. The conventional wisdom is that tax reform can only take place in the second term of a popular president. However, the President is now in a unique situation. His overriding long-term domestic priority is controlling the national debt. Ultimately that will involve large tax increases. But mentioning major tax hikes before the 2012 election would be political suicide. The President needs a tax policy to keep attention off future tax increases. An all-encompassing tax reform would divert the attention of the media.

(6) Get the full political support of the President who needs to take major tax off the table until the 2012 election.
(7) Get the full technical support of the President. The Treasury Department is the natural incubator of tax reform ideas.

Tax reform cannot happen without curtailing the "big three" tax expenditures: the charitable deduction, the mortgage interest deduction, and the exclusion for employer provided health care.

(8) Make a deal with the charitable sector early: substitute broad based credits for the current charitable deduction.
(9) Demonize the mortgage industry. It caused the financial collapse. The mortgage interest deduction should be converted to a tax credit for fairness sake. Emphasize the benefit to homeowners of rate cuts (that leave the mortgage industry out in the cold). Provide massive transition relief in the form of tax benefits for first-time home ownership. (This is to burn off the current excess inventory of housing. Then it will no longer be needed.)
(10) Tax benefits for gold-plated health plans enjoyed by Wall Street executives and members of powerful unions must be curtailed. This is good for the budget and good for controlling spiralling health care costs.

For congressional tax writers, tax reform is an ego-booster, a power-enhancer, and a magnet for campaign contributions.

(11) Lionize the Senate Finance Committee leadership. There is nothing members of a tax-writing committee like more than a major tax reform where they are the center of attention. The SFC already works on a bipartisan basis. It is a natural place to build bipartisan tax reform.
(12) Lionize the House Ways and Means Committee leadership. In the House partisan lines are much more sharply drawn. It is important that incoming Chairman David Camp keep the Democrats involved and make sure everybody on the committee plays a role.

OK, those are just some ideas. Let's see if we can build on them.

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