Want tax reform? That is, lower rates, but fewer deductions, credits and other preferential treatment? Then keep it as far away from the fiscal cliff negotiations as possible, and accept the real compromise needed to make it possible.
To begin with, there isn’t going to be significant tax reform during the lame-duck session. Tax reform is complex at best, and there’s neither time nor, in the post-election period, energy to make it happen. For proponents of reform, perhaps the worst possible outcome would be minor changes that politicians on both sides decide to hail as “reform” in order to have something everyone can brag about. Major reform just isn’t possible in the next six weeks.
However, once major budget issues are resolved for a while, prospects for tax reform as significant as the 1986 effort are actually quite good.
Why? Tax reform is never at the top of anyone’s agenda. It’s a tough sell; the benefits are broadly shared, but eliminating preferential treatments will always impose narrow costs. And one of the classic problems of all democracies, and the American Madisonian variation in particular, is that they are not very good at promoting broad, mild benefits at the expense of easily identifiable costs to easily organized factions.
Nevertheless, reform is reasonably likely over the next two years for one basic reason: Both sides fully expect divided government, and therefore policy stalemate, over the next two years — and politicians like having accomplishments, both for political (they need something to run on) and personal (most politicians actually do like getting something done) reasons.
To get reform, however, politicians in both parties are going to have to accept one basic compromise. Democrats will have to accept that real reform has to be deficit neutral. And Republicans need to agree — and agree to conventional scoring of the effects of tax changes.
For Democrats, that means separating their revenue-raising preferences from tax reform. Why? Again: Tax reform is hard. Reformers will lose votes with the choices they make; members of Congress with constituents who will be among the losers in reform won’t vote for it. If you add to that GOP anti-tax absolutists … there’s no chance of getting to a majority. In exchange for Democrats accepting deficit neutrality, however, Republicans would need to accept real math — no dynamic scoring or other gimmicks.
Would the result be good public policy? Most seem to believe that a cleaner tax code is overall a good idea. And yet even if the parties succeed in getting a triumph similar to 1986, the next step will no doubt be exactly what happened after 1986: Organized interests begin lobbying to put back their favorite preferences, or perhaps new ones get their opportunities. On the other hand, perhaps cleaning the monstrosity every few decades is a net plus. I don’t know. What I do know, however, is that real tax reform is incredibly difficult. The only way it can happen is if any other burden, such as raising revenue, is stripped away.