Tuesday, December 28, 2010

Tax Reform? Not So Fast

As talk grows in Washington about the prospects of a rewriting of the US tax code next year, Ezra throws a bit of cold water on the likelihood of success.
With Republicans and Democrats on board, and the relevant players in the House, Senate, and White House interested, this should be easy, right?
I doubt it. If you could agree on what the words "revenue neutral" meant, you really could redesign the tax code to feature lower rates, simpler forms and less economic drag. But given the coming expiration of the Bush tax cuts, you can't agree on what revenue-neutral means, as Democrats will say it means revenue after the cuts expire, and Republicans will say it means revenue if the cuts were extended. Until that question is resolved, every tax reform conversation will break down when Republicans realize Democrats are trying to lock in the expiration of the Bush tax cuts and Democrats realize Republicans will only reform the tax code if it means the Bush cuts live forever and ever, amen.

But the bigger problem is that no one's first love is tax simplification. Politicians don't want to modernize the tax code so much as they want to change the tax code in ways that fit their long-term goals.

Conservatives want lower taxes, particularly on the rich. They want a larger percentage of Americans to pay federal income taxes, as they believe that paying federal income taxes makes you less likely to support federal spending (Question: Is there any evidence for this view?). They want major cuts in existing government programs and a high bar to creating new programs, which means total revenues have to remain below current spending and far below projected spending.

Liberals have their own concerns: They want more revenues, as they know that their programs can't survive forever unless taxes rise to meet spending. They want the tax code to be more progressive, and they want to see inequality fall. They want taxes on wealth-income brought into line with taxes on work-income. They want the social spending that runs through the tax code, like the Earned Income Tax Credit or the breaks for clean energy development, to survive, and even be expanded.

And then there are the parts of the tax code that scare politicians: The mortgage-interest tax deduction, the exclusion for employer-based health insurance, the hundreds of smaller tax breaks that the public doesn't know about but that this or that business group will fight to the death to retain.