PLANK JANUARY 7, 2013
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Tax reform died this past weekend. I won’t shed any tears, because I never thought it was a good idea. (We don’t need simpler taxes. We need higher taxes.) But with Washington still buzzing about prospects for an overhaul of the tax system, I thought somebody should tell you: It isn’t going to happen. Tax reform was always a long shot, but two recent developments make it impossible.
Obstacle #1: The deal struck last week between Vice President Joe Biden and Senate Minority Leader Mitch McConnell to avert the fiscal cliff. It restored the top marginal rate to the Clinton-era level of 39.6 percent, but only for family income above $450,000. I found this crushingly disappointing, because the fiscal cliff deal was almost certainly the only shot Obama will ever get at raising income-tax rates.
But the $450,000 threshold was also a disappointment to anyone looking forward to tax reform. The central idea of tax reform is to lower rates, make up the difference and then some by eliminating tax loopholes, and use what’s left over to lower the deficit. But so high a floor for the top bracket makes it politically very difficult to lower rates. Families with income above $450,000 fit very comfortably into the much-maligned 1 percent, and voters won’t likely stomach a rate cut for so rarified a group—a group that, in the end, even Republicans were willing to raise taxes on.
Another problem stemming from the fiscal-cliff deal is that an important source of its revenue is the restoration of Clinton-era limits on exemptions and deductions (“PEP and Pease”) for family income above $300,000. This was done to limit the revenue loss attributable to raising the top-bracket threshold from Obama’s proposed $250,000 to the Republicans’ preferred $450,000. The PEP and Pease changes are sufficiently complicated as to be invisible to much of the knuckle-dragging right, as a $250,000 threshold would not. But in taking a bite out of deductions for incomes above $300,000, Biden and McConnell shrank the pool of deductions that could be taken away from this group later. A tax reform-deal would therefore have to rely even more than previously thought on eliminating deductions for families earning less than $300,000, most of whom (i.e., families that earn up to $250,000) Obama has too-generously characterized as the “middle class.”
Obstacle #1 made tax reform very unlikely. Obstacle #2 makes it impossible.
Obstacle #2: McConnell saying (on CBS’s "Face The Nation," Jan. 6) that any tax reform must be “revenue neutral.” As a practical matter, it always seemed unlikely that a swap of lower rates for fewer deductions could reduce the deficit—certainly the 1986 tax reform, which serves as the model, did not. But Republicans have in the past tended to be slippery on the question of whether any tax reform they could support would reduce the deficit. Now McConnell is affirmatively saying it would not. And if (as McConnell asserted on "This Week") “the biggest problem we have at the moment is spending and debt,” then even Republicans have little reason to craft a tax-reform deal that will have no impact on, well, spending and debt. Democrats have none at all.
In a Jan. 5 interview with Wall Street Journal editorialist Stephen Moore, John Boehner insisted that “The president admitted . . . in the first meeting that we needed to do tax reform, and he was for a tax reform process that would lower rates." But if such reform were revenue neutral, I doubt the president would stay interested, even if Obstacle #1 didn’t exist. And anyway, Boehner in the same interview swore off ever negotiating with the president again. That means any future negotiation will fall to McConnell, who seems far less excited about the idea of tax reform than Boehner.
You may still hear Democrats talk about tax reform. But when they do, they’ll probably mean that they’d like to treat capital gains as ordinary income. “Tax reform” will be their euphemism for “higher taxes.” And (while it’s true that the 1986 reform increased capital gains taxes to bring them in line with income taxes) higher taxes aren't what most folks have in mind when the phrase “tax reform” is mentioned.
Tax reform is dead. May its weary bones rest in peace.
13 comments
I am not giving up. The 39.6 income and 40% estate tax were ony the progressive piece. We still have the capital gains dividend preference to work on. It sucks investment from small business into the secondary stock market, allows someone with large investment income to pay lower taxes than wage earners, and it allows someone like Romney to manipulate his income so that he is in a lower bracket. Job growth rose when it was removed under Reagan in 1986, dropped after it was reinstated under Clinton in 1993, and dropped further when the preference was increased by Bush in 2000.
- Nusholtz
January 7, 2013 at 3:24pm
You mean, no more sanctimony from Senator Simpson. Hey, but Senator McConnell got what he wanted, which was not to use income tax receipts to repay the $2.7 trillion owed to the social security trust fund. Which has the added benefit of bankrupting social security right away rather than having to wait another 25-30 years. Unless, of course, the sanctimonious Barney Frank joins the Senate and successfully passes his plan to adopt another whopping increase in the regressive payroll tax. McConnell and Frank remind me of Abbott & Costello, with McConnell playing Abbott (the straight man) and Frank playing Costello. I'm not sure where Simpson fits in. I suppose I don't understand Wyoming humor. Reflecting on his own wayward youth, Simpson had this to say: "The older you get, the more you realize . . . your own attitude is stupefying, and arrogant, and cocky, and a miserable way to live." Stupefying and arrogant and cocky? Simpson? Never.
- rayward
January 7, 2013 at 3:33pm
McConnell will say anything -- that he had to filibuster his own proposal in the Senate demonstrates that. Boehner to a lesser extent will say just about anything, then use the Tea-Party resistance in his own party to back-peddle. So nothing either one of them says can really be trusted. They want compromise -- as long as they don't give up anything. They want "revenue neutral" tax reform -- when we have a trillion dollar deficit. They're simply playing "starve the beast", while the rest of us are trying to get out of the Great Recession. It's a dangerous mix, since they're quite willing to threaten the American Economy to get their way. But yes, given the out-of-proportion impact of the Tea-Party Republicans, I agree tax reform is pretty dead. I just hope we can eventually get Capital Gains taxation the same as income -- not that I'm holding my breath.
- AllanL5
January 7, 2013 at 3:56pm
Tax reform was always dead. But it's weary bones will be rattled forever.
- drofnats1
January 7, 2013 at 3:56pm
Yes, Simpson-Bowles "tax reform" was always a singularly lousy idea, because we need much more progressive taxation. If it was just a re-shuffling of the bases on which each tier pays its current average rate, without increases in average rates at the top and decreases in average rates at the bottom, it would only have made matters worse. May we never hear about Simpson or Bowles again. Dumb and dumber (and I say this as one who did a little business with Bowles when he was an investment banker and then supported his Senate run). Rayward, I generally agree with your approach to things, but I am baffled by your view of the social security trust fund. The debt in the trust funds is considered outstanding and receives interest in the ordinary course, augmenting the funds. As the funds run deficits, a relatively recent phenomenon but one that is destined to continue for at least a generation, the Treasury securities in the funds are sold back into the public market to make up the shortfalls. Then, the debts have to be paid, and out of regular tax revenues. Yes, we used entitlement annual surpluses as a justification for running operating budget deficits, especially in the Reagan and Bush years when national debt rose as a percentage of GDP, the only administrations under which that occurred until Obama who inherited their mess. But the trust funds weren't stolen and will serve their intended purpose, providing at least another 10 year of cushion to these programs during which time we must indeed make choices either to fund them differently or cut them severely.
- roidubouloi
January 7, 2013 at 3:56pm
"As the funds run deficits, a relatively recent phenomenon but one that is destined to continue for at least a generation, the Treasury securities in the funds are sold back into the public market to make up the shortfalls." Right, sold back into the public market, which is another way of saying the debt will never be repaid but refinanced, as the debt is shifted from one generation to the next. A debt not incurred to pay legitimate government operating expenses, or to provide a fiscal stimulus in the time of recession, but to make possible large income tax cuts for the wealthy. It's a fraud. This attitude about the trust fund I liken to the real estate developer's creed: a dollar borrowed is a dollar earned; a loan refinanced is a dollar saved; and a loan repaid is a dollar lost forever.
- rayward
January 7, 2013 at 4:18pm
Well, the debt is never repaid. If it generally declines as a percentage of GDP, as it did in every post-war administration until Reagan/Bush and then Bush II, and Obama, who inherited the mess created by Dumbya, then we are fine. Reducing borrowing was used as a means of storing the FICA surpluses when we had them. Now, for demographic reasons, that process has to be reversed. Of course, as Gore said repeatedly in the "lock-box" debates of the 2000 election, we should have been continuing to run surpluses in the boom -- standard Keynesian theory -- to give us more latitude in all ways when the boom came to an end. We used the FICA surpluses to enable operating deficits with minimal macroeconomic effects, but the FICA surpluses weren't stolen.
- roidubouloi
January 7, 2013 at 5:30pm
"We used the FICA surpluses to enable operating deficits with minimal macroeconomic effects, but the FICA surpluses weren't stolen." It's like when Mikey told me that there was no Santa Klaus. I didn't want to believe it, and I didn't. I continued to believe, and I continued to leave cookies and milk for Santa Klaus. Until, one day, I had to buy the presents, I had to pay for the presents, I had to pay the bills when they came due. I've never forgiven Mikey. The little shit.
- rayward
January 7, 2013 at 5:45pm
The surpluses will be used to support the entitlement programs, and non FICA revenues will be used to pay for it in the form of payment of the debt sold back to the public from the trust funds, whatever Mitch McConnell may think. The far more important issue is how to finance social security and Medicare into the future. And even more important than that question is when and how we are going to get our medical costs under control. At 18% of GDP and still rising, medical care is going to wreck our economy whether we have Medicare and Medicaid or abandon them completely. We cannot afford our medical system, and we don't have to if we are willing to follow the example of every other advanced industrial economy.
- roidubouloi
January 7, 2013 at 6:28pm
As the wizard said to Dorothy, don't pay any attention to the man behind the curtain.
- rayward
January 7, 2013 at 7:25pm
I thought he was talking to Toto.
- roidubouloi
January 7, 2013 at 7:51pm
is it just me or is Harry Reid MIA more than usual? and is that a good thing or bad thing?
- teoc
January 8, 2013 at 12:22am
How do we know this isn't an opening position for the bargaining over the sequester?
- subterra
January 8, 2013 at 11:17am