A Path Forward on Tax Reform

By :: May 22nd, 2012

At the National Tax Association’s spring conference last week, former Congressional Budget Office Director Doug Holtz-Eakin laid out a path to tax reform in four simple, clear steps. Doug, who was also a top policy aide to the 2008 McCain for President campaign, was absolutely on point. And his analysis was both evidence of how hard reform will be and a possible roadmap to getting there.

His four steps were:

1. Recognize that the U.S. will have a progressive tax code (the flat tax, he said, is, “naïve”).

2. Agree on a top rate.

3. Agree on how much revenue you want to raise.

4. Eliminate or scale back the tax preferences you need to accomplish the first three.

Easy-peezy, as they say.

We should be able to get agreement on the first. With the exception of a handful of dead-enders, as Dick Cheney said in another context, there is a broad consensus in the U.S. that the tax code should be progressive. How progressive, of course, is matter of debate. But for the most part that argument will happen within some fairly narrow parameters. And it is not irreconcilable.

Similarly, with leadership from both parties, we could reach consensus on the top rate and scale other rates down from there. We did it in 1986, though there was some slippage from where that debate started. The fiscal commission chaired by Alan Simpson and Erskine Bowles used the same technique.   

The third step may be the key to the whole enterprise--and the toughest to achieve. Without agreement on a revenue number, there is zero chance of a successful tax reform. But to get there, Congress has got to find a way to reframe the current unproductive battle over this issue.  

That’s why Doug may be on to something when he talks about setting a revenue goal.

This not the same as arguing about how much we want to raise or lower revenues. Going down that road leads only to re-litigating the 2001/2003/2010 tax cuts and leaves Congress trapped in the toxic vortex of budget baselines. While this makes a small group of budget wonks very excited, it is a road to policy oblivion.

What if, instead, Congress and the President agreed that the new reformed tax code should raise xx percent of Gross Domestic Product in revenue in 2022? No baselines, no snarling argument over whether this would be a tax cut or a tax increase. Just…a number.

I’m not saying that getting there will be easy in today’s political environment. It will, in fact, be extraordinarily difficult. But the prospects for consensus are much higher than if the debate never gets past what to do about decade-old tax cuts.

The last step in Doug’s roadmap is figuring out how to pay for reform. And, oddly perhaps, that might be the easiest bit of all. As Ronald Reagan, Dan Rostenkowski, and Bob Packwood learned in 1986, once the leadership agrees on a rate and a revenue number, it is very hard for the lobbying class to fully protect its clients’ interests.

Sure, there will be some nips and tucks. But the basic outlines of that first draft are always very hard to budge. 

Will Doug’s roadmap get us to reform? It’s still very hard to see. But it is at least a plausible path.

 

 

 

7Comments

  1. Ralph H  ::  4:21 pm on May 22nd, 2012:

    With all due respect to Mr Holtz-Eakin, there will have to be another step unles a fillabuster proof Democratic majority is elected. Need to agree von spending as a % of GDP. Until that is done you will not get Republican agreement on the other points. There is ample evidence that EACH party cannot be trusted to limit expenditures (in their own ways).

  2. Congressional Budget Office: Yeah Guys, Jumping Off the ‘Fiscal Cliff’ Is as Bad as It Sounds | Swampland | TIME.com  ::  6:32 pm on May 22nd, 2012:

    […] Tax Association’s spring conference (it’s like spring break but, you know, not fun), has a thought: a simple solution for a simple problem. What if, instead, Congress and the President agreed that […]

  3. Michael Bindner  ::  9:28 pm on May 22nd, 2012:

    Doug will be shouted down by Norquist until his donor pool realizes that Obama could by fiat let all of the 2001/2003/2010 tax cuts expire. If the economy is doing well, he has no reason not to. Because what is wrong with the economy is mortgage debt, not fiscal policy, he might as well play hardball. If he can get away with selling Freddie and Fannie to Bernanke and letting the Fed write down principal balances, he can tell the GOP that if they don’t compromise, Clinton rates come back.

    I still like my proposal better than Douglas’. Have a visible consumption tax fund discretionary US spending (both military and civil), have an employee payroll tax and a hidden consumption tax (with offsets) fund entitlements (health, old age, education, family/income support – including tax benefits paid through wages) and have only the top 10% – 20% pay an income and inheritance surtax (could be flat, could be graduated) with few – if any – deductions with that tax funding overseas military and naval sea spending, repayment of the Social Security trust fund and interest on the debt. Require that all accounts funded by consumption taxes be balanced, but allow the items funded by the income surtax to run a deficit in time of war. Of course, if you specifically make upper income taxpayers responsible for paying back the debt, they will likely seek to pay it back sooner than later – since if they take their time – their children and grandchildren rather than the entire next generation will be responsible for paying back the debt. Of course, in reality, this is already the case. Making it explicit, however, will stick a stake in the heart of the anti-tax movement.

  4. Kevin  ::  10:35 am on May 23rd, 2012:

    Very well said Howard. The main problem is the frame of the debate. Instead of arguing over the relevant policy (what should the overall level of taxation be), all of the debate focuses on the change in marginal taxation with respect to some arbitrary baseline. To me the debate seems to be taking place in reverse of what it should. Congress is trying to decide on marginal rates (btw who is to say that either the Bush levels or the Clinton levels are correct) and then is content to let the overall level of taxation be what it may. Rather, they should be deciding what the overall level of taxation should be, and then figure out what rates will get us there.

    So the relevant question becomes, how do you reframe the debate in the manner suggested by Howard and Doug? I’m not holding my breath waiting for it to happen…

  5. Vivian Darkbloom  ::  4:10 pm on May 23rd, 2012:

    There is something missing in Holz-Eakin’s roadmap—and in Gleckman’s response to it. Before we get to that, I’ve got an issue with the nomenclature. The discussion here is about “tax reform”. That term seems to be mis-used here. Most dictionaries would define “reform” as an “improvement”. But, very little, if anything, discussed in these steps has to do with improving the tax code (although I agree step 4 might contribute to such an improvement). The discussion, rather, is on how we can agree to merely change it—presumably to raise additional revenues? Change for the sake of change cannot be said to be an “improvement” and therefore would not constitute a “reform”, at least in my lexicon. I don’t know what criteria, if any, are used to annoint a tax bill with the name “Tax Reform Bill”; however, if you look at the history of the Code, very few bills are called that. That would be an interesting topic for discussion…

    What is missing from these steps is any agreement on the level of spending that will accompany those “tax reforms”. Associated with that is any agreement on the level of federal deficit that is considered to be acceptable, much less sustainable. It strikes me that an agreement to target tax receipts at x percent of GDP is not necessarily going to ensure any agreement unless we also have an agreement to limit spending to y percent of GDP. The two are inextricably bound.

  6. Tax Roundup, 5/24/2012 « Roth & Company, P.C  ::  9:46 am on May 24th, 2012:

    […] A Path Forward on Tax Reform.  We’ll go down that path when there are no others […]

  7. AMTbuff  ::  12:27 pm on May 24th, 2012:

    Correct. We need agreement on a spending limit and also on the policy changes that will ensure spending remains below the limit. Without major policy changes any spending limit will be breached. It would be like promising to lose 20 pounds without changing your eating habits.