Friday, December 03, 2010

Two perspectives on tax reform

Bruce Bartlett notes today that the Simpson-Bowles tax reform proposal, by reducing statutory tax rates in exchange for repealing tax expenditures as defined from a Haig-Simons income tax perspective, might actually end up increasing effective tax rates on saving and investment. Hence, from a principled conservative perspective (if there are any left besides Bruce and a few others), the proposal could be viewed as moving in the wrong direction. I'd add that, in the academy (across the political spectrum) as well as among a few liberal bloggers, the case for replacing the income tax with a progressive consumption tax has considerable support. But I don't see us ever getting there.

David Brooks' column today urges Obama to embrace comprehensive income tax reform (such as Wyden-Gregg) as a game-changer with virtues that include the following:

"The health care reform debate was polarized, but the tax reform debate is not. Almost everybody agrees on the basic outlines. The current system is so rotten everybody could get something they want out of reforming it.

"The tax reform process would reintroduce the parties to each other, and reduce the Manichean caricatures that have built up in their heads. It would also shift attention from the same-old big government-versus-small government debate toward more concrete challenges: shifting resources from unproductive consumption to more productive investment; shifting money from the affluent elderly to the struggling young; eliminating the parts of the tax code that erode personal responsibility and buffing up the parts that encourage responsible risk-taking."

I wish this were true, but unfortunately it's not, on multiple levels. Earlier in the column, for example, Brooks tells us of an interesting encounter at AEI with Paul Ryan, who claimed that, since Obama is taking us on the evil road to Sweden (!), he must be resisted 100% on everything. Ryan believes this because he wants to; it helps reduce cognitive dissonance regarding the ruthless political strategy he has signed up for. So it's not going to be dispelled by a sudden announcement that Obama wants comprehensive tax reform.

Among the truest words ever spoken about comprehensive tax reform were by Dick Gephardt, as quoted in the Birnbaum-Murray account of the 1986 tax reform act. Gephardt, as an ambitious pol on the make, had signed on to Bill Bradley's tax reform plan, causing it to be known ever after as "Bradley-Gephardt." By 1985, however, when I was on the Joint Committee on Taxation staff, there was probably no single Democratic member of the House Ways and Means Committee who was less interested in tax reform than Gephardt. He had decided that opposing free trade offered more political upside. Anyway, as quoted in Birnbaum-Murray, he told the other Democrats about tax reform: "It's not that good an issue." And, as a political matter, he was right.

1986 tax reform only passed because of what the economist Henry Aaron has called the "dead cat" problem. Whichever political leader killed it would have a "dead cat" on his doorstep, which needless to say no one wants. The problem was that the killer of tax reform, in the rhetoric prevailing in that era, would have been viewed both as "failing to lead" and as having sold out to the special interests. (Hence the New Republic called the Senate Finance Chair "Senator Hackwood" when it looked like he was going to let it die.)

But at the same time, no voters actually liked comprehensive tax reform (Gephardt's point). Taking away targeted tax breaks (including but not limited to those that are not actually tax expenditures from a consumption tax framework) in exchange for the more diffuse benefit of lower rates goes completely against the interest group nature of politics (and the interest groups are all of us, not just the well-financed Washington lobbies but certainly including them). In short, while voters may think they hate the existing tax code, any proposal to replace it would draw vastly more fire within a very short time.

If Obama took the course that Brooks recommends, a collective yawn would be the best he could hope to get. The reality would probably be much worse. And this is even leaving aside the zero percent chance that the Republican leadership would give even the slightest consideration to engaging with it.

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