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Wednesday, September 28, 2016

How the ‘Fiscal Cliff’ Could Bring About Real Tax Reform

How the ‘Fiscal Cliff’ Could Bring About Real Tax Reform

Tax reform appears dead in the water, but the dreaded “fiscal cliff” could actually offer reformers some hope.

It began with a critique of Mitt Romney’s tax proposal. But more than two months after the Tax Policy Center released a report with the anodyne title “On the Distributional Effects of Base-Broadening Tax Reform,” the entire promise of tax reform, whether Romney’s or some other version, is near death. With its demise goes the idea of a budget grand bargain. It’s been a subtle development, but a dramatic one that will reshape the landscape of policy possibilities, especially if President Obama wins re-election — probably for the better.

Tax reform is typically sold as a win-win-win that can achieve three goals at once: reduce rates, bring in more revenue for deficit reduction, and clean up the loopholes in the tax code that create economic distortions and slow growth. This vision was not Mitt Romney’s alone. It was and still is shared by many Democrats, notably Senator Dick Durbin, the White House, most members of the Bowles-Simpson deficit reduction commission who voted for its report, and most of the promoters of a budget grand bargain. I’ve held this religion myself.

But the vision of “base-broadening tax reform” is not just a budget solution — it’s a nostalgic fantasy about American politics, a hope that we can recreate the kind of bipartisan compromise and collaboration of the idiosyncratic 1970s and 1980s, symbolized by the tax reform of 1986. (Last week I argued in a debate published in the Breakthrough Journal that the old era of bipartisanship was idiosyncratic, and we shouldn’t expect it to come back.)

The Tax Policy Center report was perceived as an analysis of the Romney tax plan, showing that his math didn’t add up. But as its title indicates, it really wasn’t a report on Romney’s plan at all, but on base-broadening reform more generally. It showed that Romney couldn’t achieve his two goals — lowering rates and eliminating tax expenditures without significantly increasing taxes on the middle class or raising the deficit — because while tax expenditures such as the home mortgage interest deduction provide large benefits to the very rich, the more numerous middle-class recipients account for a large share of the costs. If Romney can’t achieve his two goals (his plan would not explicitly aim to increase revenues or reduce the deficit, relying instead on a vague hope that lower rates would drive economic growth to implausible heights), then how could we possibly achieve three goals: lower rates, fewer loopholes, and higher revenues? Nor would it be easy to achieve two other goals, fewer tax expenditures and significantly higher revenues, while keeping rates at their current level.

That’s because we’re in a very different situation than 1986. In the 1980s, the tax code was littered with provisions that benefited specific industries (especially oil and gas) and permitted individuals and corporations to take losses for tax purposes when they hadn’t really put money at risk. These “passive losses” distorted economic decisions. Just as all those provisions had been created by a kind of log rolling among legislators (those from states that benefited from pharmaceutical or agricultural tax breaks didn’t object to the oil and gas breaks), legislators in the reform coalition were essentially able to hold hands and eliminate all of their tax earmarks at once. The tax rates were nominally quite high, though no one actually paid them, so bringing the top rate down from 50 percent was a lot easier than bringing it down from 33 percent. And while there was some concern about the short-term federal deficit in 1986, it was easy enough to separate that issue from tax reform and keep it revenue neutral in the long term.

While the tax code is a mess once again, it’s a mess in a very different way. Tax rates are now too low, not too high; the most fundamental problem with the system is that it doesn’t bring in sufficient revenue to finance basic functions of government (not just in a recession, when that’s to be expected, but in the long term); and the biggest tax expenditures are not special benefits to particular industries or constituencies, but large-scale deductions that largely benefit the well-off yet give just enough to the middle class that eliminating them affects a lot of people. And while we might prefer that tax preferences such as the mortgage-interest deduction had never been invented, eliminating them or capping them would be enormously disruptive to the fragile housing market and would disproportionately affect younger families. It’s extremely unlikely that Congress will have the will to cut that deduction, the deduction for state and local taxes, or the deduction for charitable giving.

That leaves two alternatives. One is to eliminate some or all of the tax preferences for investment income – not just the “carried interest loophole” through which Mitt Romney makes much of his vast income, but the entire preference for capital gains and dividend income that makes that and other loopholes possible. (Almost all the tax gimmicks exercised by the rich involve redefining compensation as capital gains to enjoy the 15 percent rate.) There doesn’t seem to be much enthusiasm even among Democrats for fully equalizing treatment of capital gains and dividends, although we did it in 1986 and the economy thrived. The second alternative is some kind of global cap on deductions, which is where Romney has gone, first suggesting a cap of $17,000, then $25,000, but never with much detail about which deductions would fall under the cap. A $25,000 cap would raise about $1.2 trillion over 10 years according to the Tax Policy Center, which is not trivial. But a cap would hit upper-middle income households almost as hard as the very rich.

All these moves, along with the administration’s tortured “Buffett Rule,” fall well short of real base-broadening tax reform. But the fantasy of tax reform is essential to those who believe in a budget “Grand Bargain,” because the only moments when Republicans have hinted they might accept any revenue increases have been when it’s packaged under the guise of “base-broadening reform.” No tax reform, no grand bargain. That’s why the Committee for a Responsible Federal Budget, an organization funded by the Peter G. Peterson Foundation to push for a budget deal, has been almost as obsessive about rebutting the Tax Policy Center’s and other analyses as Mitt Romney has been, though not more persuasive. Senator Charles Schumer was the first to say out loud that tax reform wasn’t going to happen, in an October 9 speech. Since then, other Democrats have recognized that tax reform, especially if it begins with the current Bush tax rates as the baseline, “could be a trap,” as Chuck Marr and Chye-Ching Huang of the Center on Budget and Policy Priorities put it in a June report.

  • DEMOCRACY—————— PLUTOCRACY
    WE THE PEOPLE————- WEALTHY FEW
    ONE PERSON ONE VOTE—ONE DOLLAR ONE VOTE
    GOVERNMENT—————–LIMITED GOVERNMENT
    MAJORITY———————–SUPERMAJORITY
    INFORMATION—————–PROPOGANDA
    TAX WEALTHY—————–TAX CUTS FOR WEALTHY
    BUDGETS————————-BUDGET CUTS
    JOBS PROGRAMS————–BANK BAILOUTS
    WELFARE————————WARFARE

    • daniel bostdorf

      The 1930’s had the Brown Shirts.
The 1950’s had Joseph McCarthy
The 1980’s had Ronald Reagan….
The late 1990’s had George Bush JR…
Today we have The Teaparty and the “red shirts.”
The American Right invented it’s imaginary Obama to try and get us to by into their fascism.
It didn’t work.
Obama is going to win. Electoral College assures it.

  • Unfortunately, both sides of the aisle were already told what would be needed to fix our government’s long term financial problems. The problems were as follows:
    Democrats refused to come to terms with Social Security, Medicaire and Government Retirement reforms.
    Republicans refused to come to terms with increasing revenue, eliminating industry targeted tax breaks, and limiting defense spending, especially for programs that the DoD says they didn’t need, but benefited certain industries.
    Add to that the Trickle Down Economics that hasn’t worked since the 1980s (how many jobs have job creators actually created since 2001?) are being touted again as the solution to all our problems. Folks need to listen to the words of former President George H. W. Bush back when he was a candidate, and referred to this as Voodoo Economics.

  • daniel bostdorf

    We really need to keep this simple phrase from Schmidt in mind when posting….

    Although we all know the ad nausum usual Karl Rove fascists paid anonymous posters will be out in force with this one…

    Schmidt:

    ” If President Obama is re-elected, he will have the initiative to propose a package of tax cuts, restoring some of the Bush tax cuts for the middle class and perhaps others, in addition to other tax changes and modifications to the sequestration plans.”

    First of all….Obama has Electoral College in his pocket.
    Second…Elizabeth Warren will take Scott Browns Senate seat 47 to 43% as of polls today.
    Akin and Mourdock are toast too.

    If Obama loses, and Senate goes Republican…

    WE ALL FALL OFF THE “FISCAL FASCIST CLIFF.”

    We lose Democracy.

    Tthe song “Democracy” state it best :

    Padded with power here they come
    International loan sharks backed by the guns
    Of market hungry military profiteers
    Whose word is a swamp and whose brow is smeared
    With the blood of the poor

    Who rob life of its quality
    Who render rage a necessity
    By turning countries into labour camps
    Modern slavers in drag as champions of freedom

    Sinister cynical instrument
    Who makes the gun into a sacrament —
    The only response to the deification
    Of tyranny by so-called “developed” nations’
    Idolatry of ideology

    North South East West
    Kill the best and buy the rest
    It’s just spend a buck to make a buck
    You don’t really give a flying fuck
    About the people in misery

    IMF dirty MF
    Takes away everything it can get
    Always making certain that there’s one thing left
    Keep them on the hook with insupportable debt

    See the paid-off local bottom feeders
    Passing themselves off as leaders
    Kiss the ladies shake hands with the fellows
    Open for business like a cheap bordello

    And they call it democracy
    And they call it democracy
    And they call it democracy
    And they call it democracy

    See the loaded eyes of the children too
    Trying to make the best of it the way kids do
    One day you’re going to rise from your habitual feast
    To find yourself staring down the throat of the beast
    They call the revolution

    IMF (international monetary fund) dirty MF
    Takes away everything it can get
    Always making certain that there’s one thing left
    Keep them on the hook with insupportable debt….

    Please vote Democracy with Obama….not fascism with Romney.

  • Lovefacts

    Romney winning = life according to “Soylent Green” minus the actual soylent green for food.

    • DurdyDawg

      Don’t bet on that last statement, Love.. I wouldn’t put anything past Monsanto, so if you run into red veggie and blue sea food wafers in the future.. stay away from the green!

  • chisolm

    Only in America, could the rich-who pay 86% of all income taxes – be accused of not paying their fair share by people who don’t pay any income taxes at all.

    What is wrong with a government that collects more tax dollors than any nation in recorded history, still spend more than a trillion dollars a year than it has and still complain that it doesn’t have enough? Government has spent trillions of dollars, we don’t have, over the past few years trying to stimulate the economy and it obviously has not worked and never will.

    • grammyjill

      Do you ever go out of your house? It is working. If the republicans in congress had passed the jobs act, the infrastructure bill and the vets job corps and training bill we would be almost back to where we need to be. So, instead of constantly bitching about the president, why don’t you try to vote out the republicans that refuse to help bring this country back.

    • Replying to chisolm –

      JUST LIKE THE REST OF THE FAUX CROWD – ONLY WORRY ABOUT DEFICIT SPENDING WHEN A DEMOCRAT IS IN THE WHITE HOUSE.

      HOWEVER, IF THE BUSH/CHENEY CLONES WIN ELECTION, ALL THE WORRIES ABOUT DEFICIT SPENDING
      WILL QUICKLY BE FORGOTTEN…

      IT WILL BE SPEND, SPEND, SPEND. AS LONG AS IT INCLUDES MORE TAX BREAKS FOR THE WEALTHY. AND THE SPENDING WILL BE ON THE MILITARY-INDUSTRIAL COMPLEX. WHILE TAKING A MACHETE TO ANYTHING THAT BENEFITS THE 47%.

  • S-3

    @daniel bostdorfCollapse

    Polls are different everywhere… and untrustworthy. I want proof this is true. Otherwise, I have an excuse to take to the streets!

    I say these things – because IO believe America will fail and die under Romney – and we will all be on the streets, killing one another for food and clothing. I do not want this.

    • DurdyDawg

      An extreme vision but not altogether unbelievable. Just trying to calculate Romney’s.. ‘plan’.. without taxes, with two-trillion EXTRA to the military, most definitely leans toward a middle class collapse and a systematic elimination of the poor and elderly. The Romney clan (which will be 90% Bush zombies) says if the people allows them to privatize S.S., it won’t affect the near or current retirees. This is a lie/truth in that they won’t have to do a thing, the dwindling of the trust without replenishing will go under within ten years then after that, what? Yessir.. By privatizing everything, Romney’s next order would be to change us into the ‘United Corporations of America’ and the only ones who will lose will be .. “We the People”.

  • DON’T FORGET – THE BUSH TAX CUTS WERE LIMITED TO ONLY FIVE YEARS, BECAUSE THE AMOUNT OF DEBT IN THE FOLLOWING YEARS WAS SO STAGGERING THAT IT WOULD HAVE BEEN IMPOSSIBLE TO SELL IT TO THE POOR SLOBS WHO ONLY SAW A SMALL INCREASE IN TAKE HOME PAY.

    NOW THAT OBAMA IS STUCK WITH A SYSTEMATIC DEFICIT CAUSED BY THOSE TAX CUTS, REDUCED EMPLOYMENT, (WHICH STARTED DURING THE BUSH YEARS), THE HOUSING BUST, (WHICH STARTED DURING THE BUSH YEARS), AND TWO UNFUNDED WARS, (WHICH WERE ALSO STARTED DURING THE BUSH YEARS), AS WELL AS “THE SPEND, BABY, SPEND, (AND BORROW),” ATTITUDE OF THE EXTREME RIGHT DURING THE BUSH ADMINISTRATION , IT IS TIME TO BLAME PRESIDENT OBAMA FOR THE DEFICIT.

    THE GROVER NORQUIST PAWNS ARE REQUIRED TO NEVER ACCEPT A TAX INCREASE. SO THE ONLY WAY TO REDUCE THE DEFICIT IS TO CUT THE BENEFITS SIDE OF THE EQUATION.

    And it is mathematically impossible to reduce the deficit by cutting benefits alone. Not to mention the moral argument about “WHATSOEVER YOU DO TO THE LEAST OF THESE, SO YOU DO UNTO ME.”

    So much for the Christian Right.