Tax Analysts Blog

Will Obama Victory Kill Tax Reform?

Posted on Sep 22, 2012

At the moment all the chatter in tax news is about the release of Romney's 2011 tax return. That's politics. Left unnoticed and buried in the middle pages of the Washington Post is an article with huge implications for future policy. In "GOP Retreat on Taxes Likely if Obama Wins" Lori Montgomery and Paul Kane have three Republicans on record reasoning out loud that an Obama victory would force many in their party to concede to Obama's position on extending the Bush tax cuts only for households with incomes below $250,000. For example, the story quotes Sen. Jim DeMint (R-S.C.) “We’re not going to save our defense unless we go along with the president’s wishes to raise taxes on small business,” . . . I would never support it. [But] there are enough Republicans, I think, who are so afraid of defense cuts that they would probably give in.”

If the President is re-elected and Republicans agree to raising $800 billion of new revenue (over 10 years) from tax increases on the wealthy, a major impetus for tax reform is taken off the table. This is one of the most important lessons you learn from reading Bob Woodward's new book about the 2011 debt limit debacle, The Price of Politics. In 2011 budget negotiators wanted tax increases to be wrapped in a package of tax reform to make them more palatable to Republicans. An $800-billion tax revenue-raising tax reform was part of the "grand bargain" negotiators almost agreed to.

If there is a grand bargain in 2013 with $800 billion in Obama-proposed tax hikes already included there is no longer any need for tax reform to serve as the revenue component of any deal. In this not unlikely scenario, tax reform would not be dead, but it no longer have all of Washington's deficit hawks behind it. We would be back to where we were about five years ago. Tax reform would have to gain favor on its own merits (i.e., fairness, growth, competitiveness, simplicity) and not as camouflage for a politically painful budget deal.

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