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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.

If there’s no tax reform and no grand bargain, what’s left? The answer is what’s called, ominously and inaccurately, the “fiscal cliff.” If some sort of deal isn’t reached by January 1, 2013, then all of the Bush tax cuts, as well as some Obama tax cuts for the middle class intended as economic stimulus, will expire.* And the defense and domestic spending “sequestrations” agreed to last summer, in the deal to avoid breaching the debt limit, will hit.

Many of these outcomes are undesirable and could damage the faltering economy if higher taxes and lower spending continue well into 2013. But consider some of the things that happen to taxes:

—Rates go up: the top rate, on income over $397,000, would go from 35 percent to 39.6 percent.

—Tax rates on investment income would go up. The rate on capital gains would go from 15 percent to 20 percent, and dividends would once again be taxed at the same rate as ordinary income.

—If you like the idea of a cap on deductions, such as Romney’s $17,000 or $25,000 cap, you get something like it. The Bush tax cuts repealed two provisions, known as Pease and PEP, that phase out itemized deductions and the personal exemption for upper-income taxpayers, and both would return. These have an effect similar to Romney’s cap but hit only the very wealthy.

—The estate tax returns.

Put these together and what do they look like? They look a little bit like tax reform. It’s not necessarily a perfect version. But revenues are higher, more income will be subject to tax, deductions will be limited for the well off. This doesn’t require a grand bargain, and it’s probably better than what would result from a grand bargain, if such a thing were actually possible. It’s simply what the law calls for.

There are plenty of less desirable things that will happen on January 1. The bottom tax rate will go from 10 percent to 15 percent, and rates in the middle will go up three percentage points. The child tax credit will go down, as will the Earned Income Tax Credit. And the budget sequester will constrain domestic discretionary spending.

But once we cross that line, we’ll be in a very different world. 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. Congress, even if one or both houses is controlled by Republicans, will hardly have the option to block everything, because all they would be blocking are middle-class tax cuts. The long-term budget forecast will change immediately, and any effort to temper long-term spending on programs such as Medicare and Medicaid, in addition to the savings likely to be achieved through the Affordable Care Act, will be in addition to the revenues gained from letting the Bush tax cuts expire, rather than held hostage to an unachievable grand bargain.

It’s hard for me to say this, because I’ve long bought the gospel of base-broadening tax reform, but in the weird circumstances of this moment, it’s not the right answer, and I’m glad that there’s a better alternative, which can be achieved just by letting the law take its course.

*It’s worth noting why each of the tax cuts expire. The Obama cuts expire because they were always intended as temporary stimulus. In the case of the Bush tax cuts, it’s a different story: congressional Republicans in 2001 and 2003 wanted to push the cuts through without any compromise with Democrats. To do that, they needed to use the 50-vote budget reconciliation process, which prohibits any provision that increases the deficit in the future. To avoid that, they made the tax cuts expire, even though they wanted them to be permanent. That’s the deep origins of the “fiscal cliff.

Mark Schmitt is a Senior Fellow at the Roosevelt Institute.

Cross-posted from The Roosevelt Institute’s Next New Deal blog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.


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Former President Donald Trump, left, and former White House counsel Pat Cipollone

On Wednesday evening the House Select Committee investigating the Trump coup plot issued a subpoena to former White House counsel Pat Cipollone, following blockbuster testimony from former White House aide Cassidy Hutchinson, who said the lawyer had warned of potential criminal activity by former President Donald Trump and his aides.

The committee summons to Cipollone followed long negotiations over his possible appearance and increasing pressure on him to come forward as Hutchinson did. Committee members expect the former counsel’s testimony to advance their investigation, owing to his knowledge of the former president's actions before, during and after the January 6, 2021 attack on the U.S. Capitol.

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Mark Meadows

Donald Trump’s White House Chief of Staff Mark Meadows wanted a presidential pardon. He had facilitated key stages of Trump’s attempted 2020 coup, linking the insurrectionists to the highest reaches of the White House and Congress.

But ultimately, Meadows failed to deliver what Trump most wanted, which was convincing others in government to overturn the 2020 election. And then his subordinates, White House security staff, thwarted Trump’s plan to march with a mob into the Capitol.

Meadows’ role has become clearer with each January 6 hearing. Earlier hearings traced how his attempted Justice Department takeover failed. The fake Electoral College slates that Meadows had pushed were not accepted by Congress. The calls by Trump to state officials that he had orchestrated to “find votes” did not work. Nor could Meadows convince Vice-President Mike Pence to ignore the official Electoral College results and count pro-Trump forgeries.

And as January 6 approached and the insurrection began, new and riveting details emerged about Meadow’s pivotal role at the eye of this storm, according to testimony on Tuesday by his top White House aide, Cassidy Hutchinson.

Meadows had been repeatedly told that threats of violence were real. Yet he repeatedly ignored calls from the Secret Service, Capitol police, White House lawyers and military chiefs to protect the Capitol, Hutchinson told the committee under oath. And then Meadows, or, at least White House staff under him, failed Trump a final time – although in a surprising way.

After Trump told supporters at a January 6 rally that he would walk with them to the Capitol, Meadows’ staff, which oversaw Trump’s transportation, refused to drive him there. Trump was furious. He grabbed at the limousine’s steering wheel. He assaulted the Secret Service deputy, who was in the car, and had told Trump that it was not safe to go, Hutchinson testified.

“He said, ‘I’m the f-ing president. Take me up to the Capitol now,’” she said, describing what was told to her a short while later by those in the limousine. And Trump blamed Meadows.

“Later in the day, it had been relayed to me via Mark that the president wasn’t happy that Bobby [Engel, the driver] didn’t pull it off for him, and that Mark didn’t work hard enough to get the movement on the books [Trump’s schedule].”

Hutchinson’s testimony was the latest revelations to emerge from hearings that have traced in great detail how Trump and his allies plotted and intended to overturn the election. Her eye-witness account provided an unprecedented view of a raging president.

Hutchinson’s testimony was compared to John Dean, the star witness of the Watergate hearings a half-century ago that led to the resignation of President Richard Nixon for his aides’ efforts to spy on and smear Democrats during the 1972 presidential campaign.

“She IS the John Dean of the hearings,” tweeted the Brooking Institution’s Norman Eisen, who has written legal analyses on prosecuting Trump. “Trump fighting with his security, throwing plates at the wall, but above all the WH knowing that violence was coming on 1/6. The plates & the fighting are not crimes, but they will color the prosecution devastatingly.”

Meadows’ presence has hovered over the coup plot and insurrection. Though he has refused to testify before the January 6 committee, his pivotal role increasingly has come into view.

Under oath, Hutchinson described links between Meadows and communication channels to the armed mob that had assembled. She was backstage at the Trump’s midday January 6 rally and described Trump’s anger that the crowd was not big enough. The Secret Service told him that many people were armed and did not want to go through security and give up their weapons.

Trump, she recounted, said “something to the effect of, ‘I don’t f-ing care that they have weapons. They’re not here to hurt me. Take the mags [metal detectors] away. Let the people in. They can march to the Capitol from here.

As the day progressed and the Capitol was breached, Hutchison described the scene at the White House from her cubicle outside the Oval Office. She repeatedly went into Meadows’ office, where he had isolated himself. When Secret Service officials urged her to get Meadows to urge Trump to tell his supporters to stand down and leave, he sat listless.

“He [Meadows] needs to snap out of it,” she said that she told others who pressed her to get Meadows to act. Later, she heard Meadows repeatedly tell other White House officials that Trump “doesn’t think they [insurrectionists] are doing anything wrong.” Trump said Pence deserved to be hung as a traitor, she said.

Immediately after January 6, Hutchinson said that Trump’s cabinet discussed invoking the 25th Amendment to remove a sitting president but did not do so. She also said that Meadows sought a pardon for his January 6-related actions.

Today, Meadows is championing many of the same election falsehoods that he pushed for Trump as a senior partner at the Conservative Partnership Institute (CPI), a right-wing think tank whose 2021 annual report boasts of “changing the way conservatives fight.”

His colleagues include Cleta Mitchell, a lawyer who pushed for Trump to use every means to overturn the election and leads CPI’s “election integrity network,” and other Republicans who have been attacking elections as illegitimate where their candidates lose.

Hutchinson’s testimony may impede Meadows’ future political role, as it exposes him to possible criminal prosecution. But the election-denying movement that he nurtured has not gone away. CPI said it is targeting elections in national battleground states for 2022’s midterms, including Arizona, Georgia, Florida, Michigan, and Pennsylvania.

Trump did not give Meadows a pardon. But in July 2021, Trump’s “Save America” PAC gave CPI $1 million.

Steven Rosenfeld is the editor and chief correspondent of Voting Booth, a project of the Independent Media Institute. He has reported for National Public Radio, Marketplace, and Christian Science Monitor Radio, as well as a wide range of progressive publications including Salon, AlterNet, The American Prospect, and many others.

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