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Right Turn
Posted at 10:45 AM ET, 11/26/2012

A better way to sell tax reform

The Post reports:

For now, Democrats are seeking $1.6 trillion in new taxes over the next decade collected from about 3 million families at the pinnacle of the income spectrum — those earning more than $250,000 a year. The Democrats want to start by letting the top two tax rates return to 36 percent and 39.6 percent when the Bush tax cuts expire.
Republicans insist on maintaining the Bush rates, at 33 percent and 35 percent, through 2013. Instead, they want to raise cash by rewriting the tax code to eliminate individual loopholes and deductions, an approach House Speaker John A. Boehner (R-Ohio) argues would be less harmful to businesses and the economy.

Democrats decline to believe the tax code will affect business activity and have not championed tax simplification. In a sense, they shouldn’t care how they get the revenue, so long as the tax code doesn’t come out less progressive. But their insistence on the symbolic increase in rates (which we know from past experience does not necessarily lead to more revenue, due to the myriad of tax-minimization opportunities in the Byzantine tax code) suggests it is not the revenue itself that is so near and dear to them.

As a senior GOP Senate adviser put it, “This isn’t about growth, or deficit, or fairness for them — this is about punishing success.” Put differently, this is making sure that Democratic constituent groups see their elected officials are getting a pound of flesh from the “rich.”

As I have noted earlier, the “rich” turn out to be not so rich and include a lot of urban professionals in deep blue states. But Republicans should not get into the game of quibbling about where to draw for rate hikes. There is one party already for grandstanding against the wealthy and making ill-advised tax policy; Republicans, at least principled ones with a clear economic vision, shouldn’t double that number.

Rather, fiscal conservatives have several policy goals that should be defended, starting with tax simplification. Getting the government out of the business of pulling this or that lever to subsidize or penalize a particular industry and perversely make it easier for “the rich” to (legally) evade income tax should be front and center.

Fiscal conservatives have long supported lowering rates and broadening the tax base, which was the basis for the 1986 tax reform. Certainly the lagging recovery is reason enough to try a pro-growth reform that maximizes incentives for work and investment.

The potential for stability in the tax code (no more annual scrambles to fix the alternative minimum tax and expiration dates on tax rate cuts) and the offer of an internationally competitive corporate tax rate would be one way to solve the problem identified by Robert J. Samuelson; namely, “Companies have $1.7 trillion in spare cash, reflecting a reluctance to invest and to hire.”

However, it is incumbent on Republicans to explain not only what they support, but why they support it. Jim Pethokoukis provides a useful summary of the GOP’s argument to the voters:

America needs faster economic growth. Faster growth would mean more jobs, higher incomes, and less debt. Not only has the economy been slow to recover from the Great Recession and Financial Crisis, it was no great shakes even before the meltdown. . . .
Getting annual growth back to at least its post-war average of about 3.4% — plus a few years of hypergrowth to eliminate the jobs and output gap ASAP — should be a central goal of U.S. economic policy. This will require a full spectrum solution reforming education, regulation, immigration, and entitlements. But revamping the tax code has a big role to play, too. Any plan must result in a system that rewards innovation and work, not lobbying and cronyism.

One way to sweeten the pot for middle-class families, as Pethokoukis points out, is to scrap nearly all deductions, lower rates and replace “the child credit, the ­child-care credit, and the adoption credit with one new $4,000 credit per child that can be used to offset both income and payroll taxes.”

The amount of additional revenue raised from tax reform, which in large part derives from spurring growth and making the tax code more efficient, should matter less to Republicans than how it is achieved. A tax deal that reduces government distortion of the economy and spurs a recovery, while also raising a great deal of revenue, should be preferable over a deal that raises less revenue (largely because of tax avoidance schemes) by raising rates for the “rich” and preserving the rest of the current, complicated tax code.

The argument does not sell itself, however. Able GOP leaders like Rep. Paul Ryan (Wis.) should step forward to lay out the party’s tax views, making clear this is not about sparing the “rich” but about reform, simplification and economic growth.

In an ideal world for fiscal conservatives, no additional revenue would be needed and reductions in discretionary and entitlement spending would suffice to obtain fiscal sanity. But in an ideal world for fiscal conservatives, the White House and Senate would not be in the hands of liberal Democrats. A deal is therefore essential (unless Republicans want to be party to a massive, across-the-board tax hike and ensuing recession).

But Republicans should hold their ground on the shape of that deal. Democrats, if they get their revenue, should have little grounds for “complaint” if the deal also attends to goals such as economic growth.

By  |  10:45 AM ET, 11/26/2012

 
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