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.

A Washington Six Pack

Ezra lists 6 points that define Washington politics now.

1) No one really cares about the deficit. No sooner had Alan Simpson and Erskine Bowles completed their work on the deficit reduction package than Democrats and Republicans reached a bipartisan accord to add $900 billion to the debt. Republicans wanted their unpaid-for tax cuts for the rich, Democrats wanted their unpaid-for stimulus measures and both sides wanted the unpaid-for tax cuts for income under $250,000. I think it's appropriate to spend while the economy is weak and then repay when it's strong, but then, I didn't just get elected to Congress by promising to rein in spending.

2) Obama is better at the inside game than the outside game. Sarah Palin likes to ask the president "how that hopey-changey stuff" is going. The answer, it seems, is that the changey stuff is going well, but the hopey stuff is proving more troublesome. Obama might have campaigned in 2008 as the inspirational newcomer who had no patience for the broken ways of Washington, but he has governed like a Washington veteran with little patience for inspired outsiders. In health-care reform, in the stimulus, in financial regulation and in the tax-cut deal, Obama has been a tough negotiator able to move his agenda through a gridlocked Congress - but he has not been able to enthuse Democrats or inspire popular support for his initiatives. He has been prickly when questioned about it.

3) And he's not over health-care reform. Among the president's most passionate moments during the post-deal news conference was his long, impromptu scolding of dissatisfied progressives who're making this into "the public option debate all over again." Obama went on to complain that liberals were so focused on the public option that they lost sight of the rest of the health-care bill - which was much larger. And he's right about that. But it's also time for him to get over it.

4) Republicans really, really, really care about tax cuts for rich people. Many Democrats had been operating under the theory that Republicans would simply obstruct everything Democrats attempted, as that was the best way to make Obama a one-termer. At least when it comes to tax cuts for very wealthy Americans, that's not true. Republicans agreed to far more in unemployment insurance and stimulus proposals than anyone expected, and sources who were involved in the negotiations agree that the mistake Democrats made going in was underestimating how much Republicans wanted the tax cuts for the rich extended.

5) It's still Ronald Reagan's world, at least when it comes to taxes. The Sturm und Drang over the tax cuts for the rich obscured the Democrats' massive capitulation on the tax cuts for everyone else. Even the party's liberals had accepted Obama's argument that the tax cuts for income of less than $250,000 - which includes the bulk of the Bush tax cuts - should be permanently extended. Another way of saying that is Democrats had agreed that the Clinton-era tax rates were too high. If you put it to most Democrats that way, they'd protest vigorously. The economy boomed under Clinton, and the Democratic Party is proud of the efforts it made to balance the budget. But Democrats are so terrified of being accused of raising taxes that they've conceded to the Bush tax rates for 98 percent of Americans.

6) We need tax reform, now more than ever. The end result of this deal is going to be an even weirder tax code than we have now - and the one we have now is pretty weird. We're extending old tax cuts and credits and adding new ones. Some of those may be extended further. Businesses won't want to see deductions for investments expire, and workers won't want to see the payroll-tax cut expire, and the super-rich won't want to see the tax exemption for estates up to $5 million expire. There are so many constituencies fighting for so many breaks that the only hope we're going to have when we actually do need to reduce the deficit - which isn't yet, but will be soon - is to start from square one on the tax code.

The Tax Deal

Sully on the Obama tax deal.

And notice that Obama has secured - with Republican backing - a big new stimulus that will almost certainly goose growth and lower unemployment as he moves toward re-election. If growth accelerates, none of the current political jockeying and Halperin-style hyper-ventilation will matter. Obama will benefit - thanks, in part, to Republican dogma. So here's something the liberal base can chew on if they need some grist: how cool is it that Mitch McConnell just made Barack Obama's re-election more likely? Bet you didn't see that one coming, did you?

The mix of policies is also shrewd from a strategic point of view.

At some point, I suspect, the Congress will have to decide between extending the payroll tax holiday or keeping the Bush tax cuts for millionaires - the double-track of the current Keynesian deal. I think Obama wins on that one, and has set up the kind of future choice the GOP really doesn't want to make. What he has done, in other words, is avoid an all-out fight over short-term taxes and spending now in the wake of a big GOP victory in order to set up the real debate about long-term taxes and spending over the next two years, leading into a pivotal 2012 election that could set the fiscal and political direction of this country for decades, an election in which he may well have much more of an advantage than he does now.

This is the difference between tactics and strategy. The GOP has won again on tactics, but keeps losing on strategy. More broadly, as this sinks in, Obama's ownership of this deal will help restore the sense that he is in command of events, and has shifted to the center (even though he is steadily advancing center-left goals). It's already being touted as "triangulation" by some on the right even as it contains major liberal faves - unemployment insurance for another 13 months, EITC expansion, college tax credits, and a pay-roll tax cut.

My view is that if this deal is a harbinger for the negotiation Obama will continue with the GOP for the next two years, he will come into his own.

The more his liberal base attacks him, the more the center will take a second look. And look how instantly the GOP's position has shifted. They have suddenly gone from pure oppositionism to dealing with the dreaded commie Muslim alien, thereby proving he is not what they have made him out to be. The more often we get the GOP to make actual tangible decisions on policy alongside Obama, the less able they will be able to portray him as somehow alien to the country, and the more they will legitimize him. Their House victory means they can no longer sit out there, portraying the country as somehow taken over by radical, alien forces - which they can simply oppose with ever ascending levels of hysteria and rhetoric. And the more practical and detailed and concrete the compromises, the less oxygen blowhards like Palin and Limbaugh will have to breathe.

Now for the short-term benefits of resolving this tax-and-spend dilemma so swiftly. The president urgently needs to get the new START and DADT through the Senate. DADT would be a major boost for his base - and the country's military. Getting START through is critical to his foreign policy cred. If he can pull all this off by Christmas - and the Senate should indeed stay open for an extra week - the last Congress will indeed be viewed by historians as one of the most substantive (and liberal) in recent history. And Obama will have orchestrated it - while ending up firmly planted and rebranded in the center.

It's Not Really So Bad

Sully takes exception with the liberal angst about the Obama presidency.

This strikes me as grotesquely unfair. I sure know what maters to the president, and a brief survey of his first two years would reveal it rather baldly. "Non-argumentative reasonableness" so far has prevented a second great depression, rescued Detroit, bailed out the banks, pitlessly isolated Tehran's regime, exposed Netanyahu, decimated al Qaeda's mid-level leadership in Pakistan and Afghanistan, withdrawn troops fron Iraq on schedule, gotten two Justices on the Supreme Court, cut a point or two off the unemployment rate with the stimulus, seen real wages for those employed grow, presided over a stock market boom and record corporate profits, and maneuvered a GOP still intoxicated with failed ideology to become more and more wedded to white, old evangelicals led by Sarah Palin. And did I mention universal health insurance - the holy grail for Democrats for decades?