Tax Reform: Going Long v. Going Prudent

By :: May 30th, 2012

Make no mistake, any attempt at tax reform will be a heavy lift. But an interesting behind-the-scenes debate is brewing among reformers over just how high to aim. And some Republicans insist that big, broad-based reform would be easier to accomplish than a more modest rewrite of the Revenue Code.

The go-long theory, favored by House Ways & Means Committee Chairman Dave Camp (R-MI) and others, works like this: The way to break the logjam over reform is to propose an aggressive, attention-getting, block-buster rate cut. And you finance this ambitious goal by going after everybody’s tax preferences, not picking and choosing among the oxen to be gored.

Such a strategy serves two purposes, they say.  First, a big rate reduction—say, bringing the top corporate and individual rates down to 25 percent from today’s 35 percent—would generate the sort of popular enthusiasm that a more modest effort cannot. Who, the Camp camp asks, is going to get excited about knocking the top rates down from 35 percent to, say, 32 percent? It’s a yawner, they argue.

The second benefit to this strategy, supporters say, is that it forces all special interests to take a haircut on their existing tax preferences.  There will still be winners and losers, for sure, but because nobody would avoid losing some targeted tax breaks, it would be tougher for lobbyists to protect their clients. 

This model is much like the 1986 tax reform, which from its very beginnings was an attempt to knock individual rates down significantly (Ronald Reagan’s original reform would have cut the top rate, for example, from 50 percent to 35 percent). And it is similar to the strategy of the fiscal commission chaired by Erskine Bowles and Alan Simpson, which proposed taking the top rate down to 28 percent.

Of course, the go-prudent camp has different view:  It is naïve, at best, to think that a full rewrite of the Revenue Code is possible in the current political environment.  It would, they say, be something of a miracle if Congress can agree to any reform at all, much less mega-reform.

This view says take reform one step at a time. President Obama, for instance, has said that Congress should tackle corporate reform first. The more controversial individual provisions could be addressed later.

The cynics in the cautious camp have yet another argument. They say the go-long strategy is nothing more than justification for locking in big rate cuts that are both inappropriate and unsustainable in the current fiscal environment.

And, of course, there is perhaps the most likely option of all: Go home. As they have for decades now, policymakers will talk about tax reform even as they add more targeted tax breaks to the code. 

But let's pretend Congress will enact some reform in 2013. What will it do? Today’s politics is so different from 1986 that I’m not sure how many lessons of that experience apply. And while I’d certainly like to believe that big, broad-based reform is doable, my head tells me it probably is not.

What do you think: Should tax reformers go long, or go prudent?

8Comments

  1. foosion  ::  9:27 am on May 30th, 2012:

    Go long is a transparent attempt to slash taxes for the best off, who will benefit much more than the vast majority of citizens. It’s the nature of things that tax preferences will quickly come back.

    The effort would have a bit more credibility if proponents detailed the tax breaks to be cut and the impact of such changes.

    Worse, a portion of the cuts will be offset with spending cuts, which is terrible economics in the short-term given current conditions, and will hurt the middle class.

    Benefiting the best off at the expense of the rest is not my favorite strategy.

  2. Tax Roundup, 5/30/2012: life among the jaywalkers. What rich folk don’t pay taxes? And does having someone else cover your losses make a bad investment a good one? « Roth & Company, P.C  ::  10:27 am on May 30th, 2012:

    […] Howard Gleckman: Tax Reform: Going Long v. Going Prudent […]

  3. Michael Bindner  ::  4:12 pm on May 30th, 2012:

    I suspect that the GOP provision is a bargaining position to try to get something between 25% and 28%. Unless mid-term Tea Party insanity is validated this November, the GOP powers that be know that their best chance to make a deal is before the election. While I would prefer they go even bigger by doing something as bold as Michael Graetz, Lawrence B. Lindsey or I propose – removing the requirement that most individuals file at all in exchange for one or more consumption taxes – I suspect that such a proposal must be made by a successful candidate before it could ever be adopted.

  4. AMTbuff  ::  4:32 pm on May 30th, 2012:

    Tax reform is inherently temporary. Low rates are not politically stable. Bill Clinton proved that in 1993, only 7 years after the last reform. He increased the rates halfway back to where they had been without restoring any of the tax breaks that were traded for the 1986 rates. Obama wants to go even closer to the 50% level prevailing in 1980.

    Tax reform without entitlement reform is a Trojan horse for simple repeal of tax breaks. Everybody in Congress knows this, but they are trying to fool the public into accepting the same evanescent deal as in 1986. Congress will then bring the rates back up and promote campaign contributions by offering new credits and exemptions targeted to their voters.

    Selling the same tax breaks all over again was the 1986 Tax Reform’s political gold mine. Let’s not be sold that bill of goods again. If we need more revenue to close the gap after the long-term commitments have been rationalized, then we should raise it honestly in one step. No more bait and switch Tax Reform.

  5. Michael Bindner  ::  10:03 pm on May 30th, 2012:

    The Fiscal Commission proposed both tax and entitlement reform.

  6. Michael Bindner  ::  10:07 pm on May 30th, 2012:

    This is what I wrote about the topic in comments to the Revenue and Budget Committees upon the release of the President’s Budget. It still applies:

    …Congress has four options in pursuing fiscal policy this year. It can do nothing, it can play small, it can play medium or it can go big. Our comments will address each possibility.

    Doing nothing is a possible solution to almost every issue. At the end of the calendar year, the tax cuts of 2001, 2003 and 2010 expire automatically, as do the recently extended payroll tax cut, extended unemployment insurance benefits and the suspension of the “Doc Fix” for doctors serving Medicare patients. Allowing these provisions to expire essentially solves the nation’s fiscal problems in the long term.

    If the economy is more robust in December than current forecasts suggest, which is possible if ambitious solutions are pursued by the Federal Reserve on the underwater mortgage issue, this may be the most realistic option – although in our view it would be a lost opportunity for long term reform. This is not likely, however, as richest Americans (including doctors) who by and large fund the anti-tax movement, would be the hardest hit should permanent law come back into force, and would become the loudest voices for compromise to avoid this.

    On the expenditure side, the Budget Control Act of 2011 contains within it spending caps which effectively serve as budget allocations for the purpose of enacting appropriations – making a concurrent budget resolution entirely unnecessary for the upcoming fiscal year. Voices who continue to claim that the Senate has not enacted a budget in 1000 days should be silent and if they continue to make this claim, held up to public ridicule because they should know better.

    If the law included automatic enactment of the current service budget within these allocations, as we have suggested, then the only action required for this fiscal year would be extension of the debt limit, although some analysts, among them Bruce Bartlett, have suggested that the limit itself is unconstitutional and could be dispensed with, either in law or by Administration decree. Automatic enactment of the budget and dispensing with the debt limit would spur the Congress to enact timely compromise, which would end the impulse to gridlock.

    There are two ways that Congress and the Administration can play small ball. Sadly, this is the most likely scenario given the state of the national economy. The most likely way is to delay action until after the election and, as a package, extend the debt limit through December 2013 in exchange for extending the expiring income, payroll, unemployment and medical payment provisions for an equal period of time, accepting the temporary pain of one year of sequestration.

    A slightly more ambitious version of this scenario, which leaves less to chance as far as the impact of the election (as a lame duck President has no interest in any compromise at all) is to extend the debt limit, doc fix suspension, the payroll tax cut, extended unemployment and tax rates for middle class and wealthy taxpayers through July 2013 in exchange for making certain tax cuts for lower income Americans permanent, including the 10% tax rate and expanded Child Tax Credit – offsetting some or all of the spending cuts that have already been agreed to. This allows discourse on tax reform without holding our most vulnerable citizens hostage.

    Should the President indicate that he is likely to let gridlock rule the day, a medium ball solution is more likely as opposition to a balanced solution evaporates as the likelihood of automatic tax cuts increases. The balanced solution is some combination of the cuts and tax reforms supported by the majority of the Fiscal Commission, also known as Bowles-Simpson, and the proposals of the Bipartisan Policy Center, also known as Rivlin-Domenici. Many of these proposals are similar and where they coincide seems like a fruitful place to start drafting legislation. Using the congressional budget process to begin enacting these provisions could occur in regular order, with the Department of the Treasury playing a supporting role in writing tax reform language.

    The large ball game would be to actually balance the budget and enact radical reform in entitlement revenue and spending provisions, a shift from income taxes for most filers to consumption taxes and higher tax rates on those most ability to pay…

  7. AMTbuff  ::  1:12 am on May 31st, 2012:

    But the Commission proposed no reform at all of the two fastest-growing contributors to the fiscal gap: Medicare and Medicaid. That crucial omission caused Paul Ryan to vote against a plan that was otherwise very good.

    Make no mistake: Bowles-Simpson does NOT contain sufficient entitlement reform to close the long-term fiscal gap. If Bowles-Simpson were enacted we would face an even worse problem after our leaders used its relief to kick the can down the road for another decade. Medicare and Medicaid need tight cost controls, which in turn requires major reform. Social Security reform alone is completely inadequate to justify firing our last revenue bullet.

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