By Mark Schmitt

The Win-Win Tax Reform Fantasy

April 17, 2012 4:29 pm Category: Memo Pad 7 Comments A+ / A-
The Win-Win Tax Reform Fantasy

Bipartisan dreams of raising revenues while lowering rates skirt the real problems in our tax code.

With your taxes due today, the Buffett Rule blocked in the Senate, and the next fiscal showdown (during the lame duck congressional session between the election and the seating of the new Congress in January) coming into sight, the phrase “tax reform” is beginning to be heard throughout the land. For those of us who have been pushing for comprehensive tax reform for many years, this should be a beautiful, thrilling moment.

But count me worried, not thrilled. We seem to be approaching tax reform for all the wrong reasons, and politicians of both parties are possessed of some dangerous illusions about what tax reform can and can’t achieve.

The push for tax reform is not based, as it was in the mid-1980s, on a shared belief by a wide range of politicians that the tax code is inefficient, overcomplicated, and unfair. Rather, it’s based on the fact that something called “tax reform” seems to be the only way out of the box that politicians have put themselves in. Obama has boxed himself in by his promise not to let taxes go up on any household with taxable income under $250,000. The Republicans have limited themselves even further by refusing to discuss any tax increases at all. Some Republicans, just a few, are willing to consider something called “tax reform” if it increases “revenues” slightly without increasing “taxes,” that is, tax rates. The option of letting the Bush tax cuts expire is unacceptable even to most Democrats, because it would raise taxes for the middle class, while a deal on extending the middle-class cuts is unacceptable to the Republicans because it would raise taxes on the wealthy.

But as last summer’s debt limit deal expires at the end of the year, the only alternative to the brutal sequesters of defense and non-defense spending promised in the deal is some movement on revenues in order to facilitate a deal to cut spending. And all that is left is something called “tax reform.” In the current environment, tax reform is not a positive goal, built on a vision of a fairer and more efficient tax system. Instead, it seems to be just the only way out of a situation that should never have been created in the first place.

And all too many politicians, including many Republicans and a good many Democrats, are caught in a fantasy: that tax reform might be a “win-win,” in which rates can go down and revenues go up, simply by “broadening the base.” Tax reform often represents a fantasy of a common-sense middle ground between the parties, one they could embrace if they just understood how easy it would be. Here’s John Avlon, a self-identified centrist and advocate for bipartisan solutions, on CNN last month: Tax reform is “the Bowles-Simpson idea. You can lower rates, close loopholes, and raise revenue. That should be a win- win. Only in Washington is that not a win-win.”

In fact, the idea of a win-win is all too appealing in Washington. Lowering rates, closing the loopholes (also known as “broadening the base”), and raising more revenue is the idea that most Democrats, and a few Republicans — including, without details, House Budget Chair Paul Ryan — have latched onto. But to call it a win-win is deeply misleading.

It’s useful to compare our situation with the circumstances of the mid-1980s, when the legendary bipartisan tax reform of 1986 was passed. At that time, tax rates were actually high (the nominal top rate was 70 percent) and the loopholes were many and insane. The top tax rates were effectively meaningless. The biggest loophole involved the deductibility of passive losses – investments in which the taxpayer didn’t actually take a risk. Even then, there were losers, particularly the oil- and gas-producing sectors, that relied on passive investment, and the powerful members of Congress who represented them. And even in that legendary win-win, only two of the three big goals were achieved. Rates were lowered. Loopholes closed. (Leaving many rich people better off, on net.) But revenues were not raised, because the goal of tax reform at the time was to separate it from arguments about raising or cutting taxes by making it revenue-neutral.

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The Win-Win Tax Reform Fantasy Reviewed by on . Bipartisan dreams of raising revenues while lowering rates skirt the real problems in our tax code. With your taxes due today, the Buffett Rule blocked in the S Bipartisan dreams of raising revenues while lowering rates skirt the real problems in our tax code. With your taxes due today, the Buffett Rule blocked in the S Rating:

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Comments

  • TheOldNorthChurch

    Mark you are sounding a familiar bell – “Fiscal Responsibility”. The key is fairness and equal treatment under the law. Neither of which we have today.

    Montesquieu asserted that “in a popular state there must be an additional spring, which is “Virtue”, …in a popular government, where the one who sees to the execution of the laws feels that he is subject to them himself and that he will bear their weight.. But in a popular government when the laws have ceased to be executed, as they can come only from the corruption of the republic, the state is already lost” In despotic government, “virtue is not at all necessary to it…”

    Just look at the events of the past week – GSA, Secret Service. However, ironic that they were disclosed at the 100 anniversary of the Titanic” for they are just the “Tip of the Iceberg”.

    Reform the Revenue Code – Yes and make it fair to all. End all welfare corporate and individual through the tax laws so that they are fair to all and do not bestow power on anyone.

    The American Spring

  • montanabill

    “deducting mortgage for second or third homes”? Folks, when you have that kind of money you don’t finance them. Oh, I know a lot of 2nd or 3rd home are financed, but they are financed by people who really can’t afford them, as we just saw in the housing bust.

    • http://pulse.yahoo.com/_B6RROC4IUESHT322QS5VJVPYRM Lynda

      I wish you would provide some stats that explain your claim regarding financing or not financing additional homes. We know folks who own second homes in Hawaii and elsewhere that are indeed financed. Your statement may indeed be mostly true, but some figures would be helpful in fleshing out the argument. Thanks.

      • kmmalone

        Good luck with that…the census says there are about 3 million vacation homes…that can be classified as second homes. Real estate experts estimate there are close to 40 million vacation and investment homes that could be considered second homes. Since there is no limit on the number of investment properties one can own and claim deductions for (i believe) then the 3 million vacation home number is probably the one of interest. Of these, maybe 33 percent are financed…according to different real estate web sites.

    • http://pulse.yahoo.com/_B6RROC4IUESHT322QS5VJVPYRM Lynda

      My local partner in the National Association of Realtors tells me that according to their latest figures indicate that the average 2nd home buyer is in their mid 40′s with an income in the 6 figure range. Before the plunge in housing in 2007 and 2008 a full 83% of second homes were financed compared with 92% of all homes. Since the plunge, 30% of vacation and 40% of investment homes have been paid for with cash. As far as I know you are only allowed a deduction on the first $1.1 of value on just two homes, however I can’t and won’t swear to those figures.

      • montanabill

        I wouldn’t doubt that people with a 6 figure income finance 2nd homes, but I seriously doubt that people with 7 or 8 figure incomes do, unless they suspect the money is transient or that they don’t intend to keep the house for long.

  • rustacus21

    I’ve got an idea; instead of trying accounting ‘gimmicks’, ‘shell games’ & the classic of late, ‘robbing Peter to pay Paul’, why not simply get back to what works? The progressive tax on earnings & deductions ‘only’ for ‘legitimate’ w/holdings, write-offs, etc., & nothing more, worked when in play & created a tax base that was dispersed equitably across the whole of a vibrant, increasingly prosperous society. I refuse to get drawn into a debate over taxation, as it’s useless, so lets stop B4 getting started. As a Constitutional Democracy, there absolutely MUST be a way to pay for all the ‘stuff’ (police, regulators, education, fire fighters, military (used w/the UTMOST of DISCRETION!!!), health services (keeping our water, food, air & soil PRISTINE!!!), the arts (have U ever noticed the joy & wonder on a kids face in a museum or the symphony?!) which we ALL use, depend & require, to BE a cultured, knowledgable, sophisticated, INTELLIGENT, creative society, that the world doesn’t mind emulating. B/c we all enjoy the benefits of these things, we ALL, in turn, are obligated to support them thru our taxes. NOT some to pay, but ALL Americans… NO EXCEPTIONS. We’re so busy trying to make sense out of nonsense (the Reagan/Bush/Bush tax policies), we 4get the things that did (the FDR/Clinton tax policies) actually work & well – 4 ALL Americans. The ‘Conservative’ touch has been poison each time, so case closed…

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