Tax reform could happen again, starting next year, no matter who wins the White House.
The tax code has become an object of ridicule — and intense scrutiny — for both political parties, just as it was in the 1980s. Then, as now, news stories about tax inequalities stirred public outrage. Closing special-interest loopholes was an obsession then, as it is now, as government officials scramble for revenue to avoid a fiscal cliff. Reform is being debated by serious political leaders today, just as it was so long ago.
It’s a good sign that President Obama and Mitt Romney both consider reforming the tax code in the next four years a must-do. Bipartisanship was — and remains — essential to passing so massive a bill. These days, it’s hard to imagine Republicans and Democrats agreeing on anything, let alone how to rewrite the entire tax code. In fact, though, the framework of both presidential candidates’ plans are largely the same. With notable exceptions, both would lower tax rates and reduce or eliminate tax breaks, the trade-off that was central to the 1986 reform.
Mr. Romney would cut all individual tax rates by 20 percent. Mr. Obama would allow the top two rates to rise to 36 percent and 39.6 percent when the George W. Bush-era tax rates expire this year, but would reduce the rates for middle- and lower-income families compared with current law. Mr. Obama would shave the top corporate rate to 28 percent from 35 percent. Mr. Romney would drop the corporate rate a few extra points to 25 percent. Both would curtail tax breaks to pay for rate reductions.
The plans differ in detail — especially for people at the top of the income range — but they aren’t unbridgeable. Although he doesn’t showcase the fact, Mr. Romney has said he would curb the deduction for mortgage interest payments on second homes. He also has said that under his plan, the higher a person’s income, the less his deductions and credits would be worth.
Both men also view reform as a way to raise revenue to shrink the budget deficit, though Mr. Romney is less explicit about saying so. In 1986, the last time tax reform passed, deficit reduction was not the goal, which simplified the task and enabled lawmakers to curtail relatively few credits and deductions for individuals. This time, stanching red ink is a major motivation for reform and a powerful reason for it to happen. Without the cover of overarching reform, Republicans say they aren’t willing to vote for higher taxes. Even then, they say, extra revenue should come from economic growth, not the trimming of tax benefits. Leaders of both parties are on record saying extra revenue can and should be produced from a revised tax code that has lower rates paid for — indeed, more than paid for — by truncating tax preferences.
Deficit cutting must be a major goal for both candidates, and for good reason. The accumulated federal debt exceeds $16 trillion, which is more than the country’s annual gross domestic product, the total of goods and services produced in the United States. Under Mr. Obama, the annual deficit is expected to pile on another trillion dollars or so every year for years to come. Few people in either party think that level of deficit spending is wise or sustainable.
To produce reform that meaningfully brings down marginal rates while keeping revenue constant (let alone producing extra revenue) a significant number of breaks would have to be cut, including, perhaps, some of the largest and most popular for both individuals and businesses. Reform will create winners and losers, and some of the losers will have to feel a lot of pain. Lawmakers are hesitant to inflict such pain. Congressional tax writers have spent years doling out goodies, not taking them away. Prior to the tax-reform debate of the mid-1980s, lawmakers raised taxes almost annually. Those years of passing “revenue enhancements” turned out to be good practice for the ordeal of tax reform in the late 1980s, which today’s lawmakers simply haven’t experienced.
Starting in 2013, though, Congress and the president might willingly sign up for such torture. Tax reform likely will be the only vehicle for a broad deficit-reduction deal in which Republicans agree to increasing revenues and Democrats back structural changes that rein in out-of-control federal spending.
Special interests with a great deal of clout are eager to preserve the status quo, and many of them have good, solid reasons to do so, both for themselves and for the overall economy. But that was true a quarter-century ago, too. The public would not accept “no” for an answer. They would not allow legislation called tax reform to fail. Then as now, the tax code was, in fact, unfair — and was widely perceived to be — because it allowed people and companies to pay radically different amounts of tax even when they had the same levels of income. Tax rates, then as now, were so high that U.S.-based corporations struggled to compete in the global marketplace. Polls showed then, as they do now, that voters were losing faith in the tax code, which supplies the government with the money it needs to operate.
If both parties want change, it will happen. When it comes to big change, such as comprehensive tax reform, the path will be long and filled with missteps and an outcome that’s both surprising and imperfect. The process may take years, but something labeled tax reform is likely to come out in the end. What it contains — and whom it hurts or helps — is what the debate that’s already well under way will decide.
Jeffrey H. Birnbaum is a Washington Times columnist, a Fox News contributor and president of BGR Public Relations.