JONATHAN CHAIT DECEMBER 10, 2010
The New York Times' Jackie Calmes reports that the Obama administration is thinking about some kind of bipartisan tax reform:
President Obama is considering whether to push early next year for an overhaul of the income tax code to lower rates and raise revenues in what would be his first major effort to begin addressing the long-term growth of the national debt.
While administration officials cautioned on Thursday that no decisions have been made and that any debate in Congress could take years, Mr. Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said.
Here's why this is a bad idea right now.
I do like the policy goal of broadening the tax base, eliminating favorable treatment for different kinds of income, and lowering the rates. However, the administration isn't going to be able to do this before the question of the Bush tax cuts is settled. A tax reform agreement is going to be premised on being revenue neutral (all or virtually all the proceeds of eliminating loopholes and credits will go toward lower rates) and being distributionally progressive or neutral (the rich will pay an equal or greater share of the tax base.)
The problem is, neither side agrees what base to start from. Republicans are going to want to base that off the status quo, with the Bush tax cuts in effect. Indeed, that's what the Bowles-Simpson commission did -- staffers from the plan said, look, we're more progressive than the status quo!
But Democrats can't accept that, because they both plan and have the power to let the upper-income portion of the Bush tax cuts expire. Indeed, Obama has to insist on that in 2012, for both policy and political reasons. Republicans think they rolled him in 2010 and can roll him in 2012. They're going to want to keep the Bush tax cuts as a baseline.
So here's how this has to work. Obama has to stand firm on the upper-income portions of the Bush tax cuts expiring. Then he has to win reelection. Then we get to 2013, and either the upper-income portion of the Bush tax cuts -- or, more likely, the entire thing -- has expired. We're back to Clinton-era tax rates. Then Obama can make a deal to lower the rates and broaden the base.