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Baby Steps to Tax Reform

August 1, 2013 9 minute Read by Ike Brannon

My first introduction to writing for an editorial page gave me the entirely wrong impression as to how the world works. I was spending summer at college being unproductively underemployed, and despite filling my days with as much basketball and beer drinking as I could manage, I still had a bit too much free time.

One day the school paper ran an ad asking for applicants for the editorial board for the summer, and I sent them a resume and a writing sample. I got the spot, as I was the only applicant.

The first meeting of the editorial board went exactly as I had imagined: My new colleagues proposed attacking Apartheid, George H.W. Bush, Republicans in general, racism, and the Methodist church, which at the time was resisting a motion to make its hymnal gender-neutral.

This libertarian knew he was outmanned, so I focused on something more local, proposing that we urge that the school cafeteria go from an all-you-can-eat buffet to an à la carte setting. I argued it would encourage people to eat less, help cut down on waste, and save the school and students money.

They let me write the piece, although not without inserting a few lines about how students are greedy, selfish, and wasteful, and need to care more about those starving abroad.

Soon after the piece ran a funny thing happened: The school did precisely what I suggested. Almost immediately. The article was cited in the school’s announcement, even. I felt a little powerful.

The next editorial board meeting went precisely as the previous one, and I again stuck to a parochial topic: the local dump, which was nearing its capacity. To extend the dump’s useful life, the city had recently begun a recycling program, but participation rates were low. I proposed we suggest charging a fee for each bag of garbage collected, in order to give people a further incentive to recycle.

Within two weeks of my article, the city council passed legislation to do precisely that.

Needless to say, the rest of my publishing career has failed to match my auspicious beginning. I’ve managed to infuriate a few politicians (there’s a particularly nasty message from a Congressman on my voicemail at the moment), but there is nothing I’ve written since college that I can point to and say it led to a change in policy.

However, the recent proposal by Senate Finance Chairman Max Baucus and Ranking Member Orrin Hatch to begin tax reform by starting with a clean sheet of paper and then deciding which deductions, credits, and exclusions to add back into the code — along with the necessary rate increases to pay for the break — is a brilliant idea. I say that immodestly because I suggested doing precisely this in an article I wrote a year ago for The Weekly Standard.

I have no idea whether Hatch (for whom I once worked) or Baucus or one of their staff read my piece: It’s not a particularly original idea, although it is an incendiary one, which is why I put it in an article rather than save it for a memo for my former boss. It is also an idea that is unlikely to work, at least without a change in the tax environment.

A problem with doing any kind of fundamental tax reform is that people have adjusted to the status quo, as unsatisfying as it may be, and change can be costly. We all know that the tax code Congress would arrive at if it were starting from scratch would look fundamentally different (and be much better) than where we are likely to end up at from our current starting point.

For instance, scaling back the mortgage-interest deduction will be very difficult to achieve politically: There are powerful lobbies in the realtors, home builders, and mortgage bankers who are willing to spend heavily to preserve the status quo. There are also millions of homeowners who fear losing some or all of their deduction, and they will let their Congressman know they aren’t keen on any rollback in the deduction.

But no country constructing a tax code from scratch would give up the amount of tax revenue that the mortgage-interest deduction costs (the Joint Committee on Taxation estimates that we sacrifice over $100 billion a year to the deduction) to boost home prices for the upper-middle class, which is about the only tangible effect of the deduction. If there is a way to put this calculus on the table we can improve the tax code.

The simple reality is that while ostensibly starting from scratch may seem like the way to go about doing this, we are not, in fact, starting from scratch, no matter how Sens. Baucus and Hatch proceed on tax reform. Those who object to how tax reform is proceeding and who are able to stop it are rewarded with the status quo, not a tax code bereft of all deductions.

If the current Congress fails to pass tax-reform legislation, a fallback plan that could lay the groundwork for a productive future reform would be to pass legislation that would sunset the tax code (or perhaps all deductions) five years in the future. The defenders of various special-interest provisions in the code might find it difficult to oppose a seemingly-innocuous move designed to make tax reform possible, while all those who earnestly desire reform would jump on board. I must confess that I’m not sure if that number represents a majority of either body of Congress.

A variant of this has been attempted before: the sunsetting of the Bush 2001 and 2003 tax cuts in 2012, which included lower dividend and capital-gains taxes, a lower death tax, and lower taxes on personal income, was done concomitantly, in part to encourage Congress keep some of those provisions and make them permanent. It eventually did precisely that: While tax rates on income above $400,000 went up to the pre-2001 rates and taxes on dividends increased to 20%, much of the rest of the expiring tax provisions — lower tax rates on income below $400,000, lower capital-gains taxes, higher death-tax exemptions, and a patch for the Alternative Minimum Tax that kept it from hitting all but a few million households — became permanent.

Of course, Congress quite recently created an unappealing contingency to hasten negotiations — and it led to the sequestration. Rigging negotiations to ensure an outcome superior than the status quo is no simple feat.

If sunsetting legislation cannot clear Congress, then maybe the House and the Senate should content themselves with passing the best tax legislation they can get through their bodies this session, even if they know they cannot hope to reconcile the two in a conference committee. In the next Congress, the House and the Senate bills could each be used as a new baseline, with any tax breaks added to the legislation being accompanied by a commensurate increase in top tax rates to pay for the break.

Fundamental tax reform will always be a heavy lift for a Congress: There’s a reason it’s only been accomplished once since the inception of the income tax. The current environment — with a president indifferent to such a task and a Senate Majority Leader openly hostile to reform — make it especially so. Congress should consider it a success if they take steps to make reform easier to accomplish in the future. Helping a future Congress start from scratch, without the constraints of the current tax code, would be a genuine boon to such efforts.

Just remember you read it here first.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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