Tax Reform

Bruce Bartlett has a new piece out today talking about the barriers to a politically feasible tax reform solution. Among them, he talks about the disparate impact of ending or restricting deductions among taxpayers at different income levels and the disincentives created by phasing out deductions. More generally, Bartlett’s piece really highlights the general difficulty of tax reform—without having a specific plan to analyze; revenue and growth impacts cannot be accurately assessed. However, because of the complexity of the tax code, politicians are hesitant to embrace specific reform proposals (at the risk of inducing the ire of constituents that benefit from the proposed expenditure closures).

Thus, Bartlett argues that even when “Almost everyone agrees that the ultimate goal of tax reform should be to lower statutory tax rates and that it should be revenue-neutral, that is, neither raising nor lowering net federal revenues over some reasonable time period,” producing specific proposals is very difficult.

However, I would push back against the idea that a consensus even exists surrounding the idea of revenue-neutral tax reform—both of the budgets floated by the Congressional democrats (Senate and House ) proposed revenue-positive tax reform proposals. Granted, both the Senate democrats and, in particular, the House democrats are left of “center” proposals—but that doesn’t mean they don’t have a substantial measure of support in the general population. In fact, with the extent of political polarization today, “centrist” or ‘split-the-difference’ proposals like the revenue-neutral position articulated by Bartlett above could have very little general support—most people either want revenue positive or revenue negative tax reform, but very few actually support revenue-neutral reform (a cursory search for public opinion on tax reform didn’t produce much; if anyone has the figures I would be curious to see them).

Historically speaking, it’s also not clear to me why so many people would oppose revenue-positive reform: average taxes as a % of GDP in the US have been roughly 18.5% in the post-WWII era. However,  throughout the duration of Obama’s presidency, taxes as a % of GDP have been below 16%; before Obama, you would have to go back to 1950 to find taxes at such a low percentage of GDP (how conservatives get away with their characterization of Obama as a tax and spend liberal is beyond me—he has presided over the lowest taxing, lowest spending Presidency in modern history).

Perhaps Bartlett was just referring to a corporate tax code overhaul; there, I think the consensus around revenue-neutral, rate lowering reform is greater. However, the complexity of the corporate tax code is one of the most mutually beneficial relationships between corporations and Congressional representatives, so I am actually fairly pessimistic about the prospects for significant tax reform at the corporate level.

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