Wonkbook: Tax reform is really, really hard

at 08:02 AM ET, 02/22/2012

The White House has unveiled its framework for overhauling the corporate tax code. They propose bringing the corporate rate down to 28 percent, establishing a global minimum tax, and expanding the credits for R&D and manufacturing. But they won't say exactly how to do all that.
President Barack Obama speaks at a production facility of a Boeing plant on Feb. 17. (Susan Walsh - AP)

In a sense, their document is as much about showing how hard corporate tax reform will be as it is about getting corporate tax reform done. In the first section, they list a slew of tax breaks and giveaways and deductions that we could eliminate. But, to the disappointment of many, that won't bring the rate down very far. Rather, the White House notes, bringing the rate down will require going after some combination of the deductability of interest, the treatment of depreciation, the way partnerships are taxed, and the growing disparity between the income companies report to their shareholders and the income they report to the IRS.

Put differently, getting the rate down to 28 percent requires making hard decisions about legitimate, fundamental features of the corporate tax code -- decisions that the White House will clarify, but not specifically make. Their main point, in a sense, is that it's not all about breaks for jets and oil companies, no matter how often those feature in the president's speeches.

In the second section, the administration proposes expanding the tax credit for R&D and bringing the maximum tax rate on manufacturers down to 25 percent. That is specific.

But then, in the third section, the White House follows up on an innovative idea they included in the State of the Union and proposes a global minimum tax. They say more about how such a tax will work, but they won't say how high such a tax should be. That's left up to Congress.

Depending on how you count, the White House wants all this to either raise $200 billion, or be revenue neutral. I say "depending on how you count," because their definition of revenue neutrality includes paying for a set of tax breaks, like the R&D tax credit, that we always extend, but never make permanent. As such, their definition of revenue neutral is closer to what the corporate tax code actually says, but it's about $200 billion above the Joint Tax Committee's baseline.

In a sense, this document is making two, somewhat contradictory, points simultaneously: Yes, we should reform the corporate tax code. That piece of conventional wisdom is true. But no, it's not obvious how we should to do it, and it won't be easy. The mantra "broaden the base and lower the rates" is nice, but a mantra is not actually a plan.

Whether anything comes of this document will depend, in no small part, on whether corporations really want a cleaner, simpler tax code, or whether they're more interested in protecting the breaks, loopholes, and tax arrangements they currently have. They are, after all, the primary constituents of this change, they are sophisticated about tax policy and how it affects them, and they are very politically powerful. So they will have ample opportunity to weigh in.

But all of this just goes to show how insanely difficult individual tax reform will be. For one thing, no one can decide on what "revenue neutral" means because the looming expiration of the Bush tax cuts has put at least three plausible definitions on the table: "Revenue neutral" is tax reform assuming their full expiration, tax reform assuming the expiration of only the high-income tax cuts, or tax reform assuming the extension of all the tax cuts. Nothing can be done -- nothing at all -- until that question is settled, and as of yet, the two parties are nowhere near settling it.

If some agreement is reached on the level of taxes -- and that's a big if -- we'll find ourselves facing the same point the administration is making with corporate tax reform: to get rates much lower, you have to go after the big stuff. The mortgage-interest deduction. The exclusion for employer-provided health insurance. The exclusion of pension contributions and earnings. The deduction for state and local property taxes. Those sorts of things (see the 10 largest tax expenditures here). And that won't be easy. Unlike in corporate tax reform, where the big players have departments of tax lawyers to advise them on what to do, individual tax reform has a much more diffuse and uninformed constituency, while those who could be hurt by it will, as per usual, quickly figure out where their interests like.

But over the next few days, Mitt Romney's campaign is going to try to crack this code. "Team Romney tells me there will be a bolder tax-cut plan released either at the debate tomorrow night (if Mitt gets it in) or more formally at his Detroit Economic Club speech on Friday," reports Larry Kudlow, who goes on to say that "the new plan will be across-the-board with supply-side incentives from rate reduction." So if you like talking about this stuff, there's going to be much more of it to talk about over the coming days.

This post has been updated since it originally published.

Top stories

1) Doubts remain about the Greek debt deal, reports Stephen Fidler: "No triumphalism accompanied Greece's bailout and debt-restructuring deal hammered out early Tuesday; the euro zone's two-year debt crisis has seen too many false dawns. Financial markets were somewhat cheered that months of negotiations aimed at cutting Greece's heavy debt had reached a resolution, largely putting to rest fears of a chaotic debt default next month. It also removed--at least for the immediate future--the gnawing anxiety that some policy makers in Germany and elsewhere are trying to oust Greece from the euro. But the overriding reaction was of unease that this tough deal, which has already generated huge opposition among Greeks, is bound to fail. Many observers ask not if the program will fall apart, but when."

@ryanavent: How different is, "successfully delaying crisis indefinitely" from "solving crisis conclusively"? #Greece

REACTIONS: Experts tell us whether they're optimistic about Europe’s latest bailout package for Greece. Hint: They're not.

2) The FHFA released a plan to wind down Fannie and Freddie, reports Zachary Goldfarb: "A federal housing regulator on Tuesday released a plan for beginning to scale back mortgage giants Fannie Mae and Freddie Mac -- just as the Obama administration is pressing the taxpayer-backed companies to do more to help homeowners. The Federal Housing Finance Agency, which oversees Fannie and Freddie, laid out steps to wind down the companies, largely by increasing fees charged to borrowers who take out mortgages. The FHFA’s hope is that as the cost of receiving a taxpayer-backed mortgage goes up, more borrowers will turn to private lenders, whose loans do not carry government backing. But the effort could conflict with measures being pursued by Fannie and Freddie -- and the Obama administration -- to increase the government’s role in housing."

READ IT: The FHFA's 21 page plan to unwind Fannie and Freddie.

3) The Obama administration will unveil its framework to overhaul the corporate tax code, reports Jackie Calmes: "President Obama will ask Congress to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, down from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent, a senior administration official said on Tuesday. Mr. Obama also would establish a minimum tax on multinational corporations’ foreign earnings, the official said, to discourage 'accounting games to shift profits abroad' or actual relocation of production overseas. With the framework for changes that the Treasury secretary, Timothy F. Geithner, will outline on Wednesday, Mr. Obama will enter an election-year debate with Republicans in Congress and in the presidential race who seek even lower taxes for businesses. But an overhaul of the corporate code is unlikely this year, given that political backdrop."

4) The CFPB will launch an inquiry into banks' overdraft practices, reports Ylan Mui: "The Consumer Financial Protection Bureau is expected to launch an inquiry Wednesday into banks’ overdraft practices, which have been in regulatory crosshairs in recent years. The bureau said it will look into whether banks are reordering customers’ debit-card charges to maximize overdraft fees. Reordering transactions can double or triple penalties, and the practice has been the target of several class-action lawsuits against the nation’s biggest banks. The CFPB’s inquiry also will focus on bank overdraft policies, how they market the plans, and their impact on low-income and young consumers. The agency will solicit feedback from the public...Overdraft fees have long irked consumers, who have complained that withdrawals of as little as $3 from their bank accounts have resulted in penalties as high as $37. As the recession squeezed Americans’ budgets and anger at the financial industry reached fever pitch, regulators and lawmakers began moving to curtail banks’ fees."

5) The Dow hit 13,000, reports Christine Hauser: "The Dow Jones industrial average broke through the 13,000 barrier on Tuesday, a level not seen since before the financial crisis in 2008. The Standard & Poor’s 500-stock index, which measures the broader market, also approached a significant threshold on Tuesday. For part of the day it was trading above its three-year closing high of 1,363.61, reached in April 2011. But by the end of the trading day, both indexes were showing only meager gains...The Dow pierced the 13,000 ceiling on Tuesday as attention was predictably focused on the euro zone, where an agreement was secured for a second bailout for Greece after finance ministers in the 17 European Union countries that use the euro agreed to save it from bankruptcy in exchange for severe austerity measures and strict conditions."

@mattyglesias: EXCLUSIVE: Dow is an arbitrary and mis-weighted index, you should ignore it.

@Neil_Irwin: So are we really going to make a big deal out of a random 30-stock index hitting a random level it was at just 4 years ago?

Top op-eds

1) The Greek debt deal won't work, writes Gregorz Kolodko: "The only chance for a working solution is a comprehensive, rapidly executed (in weeks, not months) - plan to cut Greece’s external debt by 80 per cent and advance it a significant loan, provided by the EU, at zero interest rate. The easiest solution would be for the European Central Bank to buy new issues of Greek government bonds, but its hyper-liberal statutes and German ethos will not allow it to do so. The ECB has off-balance sheet resources of €3.3tn, equivalent to the current value of its seigniorage. If it is only used properly, the issue of eurozone sovereign debt can be resolved...After the latest meeting of eurozone finance ministers, resulting in the decision to grant Greece a second €130bn bail-out, one might keep saying that things are on the right track. But they are not. They are heading for a catastrophe that is already unfolding, albeit in slow motion. Cheating the public and miscalculating and misleading the market is neither a strategy, nor a policy. It is sheer stupidity."

2) This should be Europe's last bailout of Greece, writes John Taylor: "If Greece violates the agreement, Germany and the rest of Europe will have to decide whether to continue future disbursements. If the European governments are at all concerned with maintaining credibility internationally or accountability with voters at home, they won't...Yet another risk is that some negative political or economic news will cause European leaders to abandon any such new 'say no' strategy. This would be the worst possible outcome. Instead of taking the opportunity to begin to end the bailout mentality--as occurred with tremendous payoffs for emerging market countries a decade ago--Europe would perpetuate incentives to follow poor economic policies for years in the future."

@DKThomp: Greece is both the world's most important story and its most boring story. It's a daytime soap: All high stakes and weak story development.

3) Exports of services offer a promising path to recovery, writes Austan Goolsbee: "While U.S. economic conditions have improved in recent months, anxiety lingers and the slumps in housing and consumer spending remain. Exports, however, have grown impressively and have plenty of room to keep expanding...Today, growing exports are a natural opportunity for us and one of the last areas of bipartisan agreement in Washington. And exports are not confined to traditional manufactured goods...Last year, according to the Bureau of Economic Analysis (BEA), the U.S. exported $2.1 trillion of goods and services (the most ever) and more than $600 billion of that came from services. Think of them as the New Exports. We already export far more of them than any other country. We export more educations than computers and more tourism than aerospace products or machinery. Unlike our massive trade deficit in goods, we run major trade surpluses in the New Exports--$179 billion of surplus in 2011 and probably more in 2012, according to the BEA."

4) Life expectancy rises during recessions, writes Peter Orszag: "A weak labor market, like the one we’ve experienced since the financial crisis in 2008, imposes enormous stress on people. Given the added anxiety created by a weak economy, you might think life expectancy would decline. Oddly, though, during recessions, exactly the opposite tends to happen: Life expectancy rises. It’s happening again now...What can we make of all this? That life expectancy seems to go up rather than down during recessions is little comfort to those suffering through a weak labor market. What’s more, the rise in suicide rates is particularly worrisome, because the sense of loss from a suicide is particularly high. Despite the increase in life expectancy from a recession, therefore, the best policy approach remains an aggressive support for the economy now, coupled with lots of deficit reduction enacted today but implemented later on."

5) We are entering a golden age of natural gas, writes Martin Wolf: "The world is in the midst of a natural gas revolution. Even the sober International Energy Agency refers to a scenario it calls a 'golden age of gas'. If such optimism proves right, the implications would not only be far greater than those of the eurozone’s painful dissolution, but would also be economically positive. Never forget that ours is a civilisation built on cheap supplies of commercial energy. The economic rise of emerging countries is bound to make the demand for commercial energy increase dramatically in the decades ahead. Gas matters. Shale gas underlines the ingenuity of those engaged in finding new sources of energy. It also suggests the welcome possibility of cheap natural gas for many decades. But this revolution could prove to be a Faustian bargain. Care needs to be taken over how - and how swiftly - the technology is introduced: environmental costs might prove heavy. 'Make haste slowly', as the ancient Romans used to say."

Cover interlude: Elliott Smith plays "Thirteen" by Big Star.

Got tips, additions, or comments? E-mail me.

Want Wonkbook delivered to your inbox or mobile device? Subscribe!

Still to come: The Fed is facing pushback for its move into housing policy; the FDA moved to ease a shortage of cancer drugs; taxpayers could pick up the tab for underfunded pensions; hydrogen fuel cell technology is on the way out; and a cat unleashes its massaging skills.

Economy

The Fed is facing criticism over its housing push, reports Zachary Goldfarb: "Senior Federal Reserve officials are injecting themselves into a noisy debate over how to solve the housing crisis, drawing criticism from some lawmakers who say the Fed has no business straying from its traditional role as the U.S. central bank...The latest commotion follows the Fed’s release last month of a report analyzing housing policy, which central bank officials say is closely related to their efforts to reinvigorate the economy. The report suggested that additional federal efforts to help homeowners could be worthwhile, even at taxpayer expense. Democrats have seized on the 'white paper' as ammunition in arguing for billions of dollars in new federal relief for beleaguered borrowers. Some Republicans have accused the Fed, which generally avoids addressing policy questions before Congress, of potentially compromising the central bank’s independence."

European consumer confidence ticked up, reports Paul Hannon: "Consumers in the 17 countries that use the euro became a little more upbeat about their prospects in February, the second straight month in which confidence strengthened. The European Commission Tuesday said a preliminary estimate indicates its monthly measure of consumer confidence rose to -20.2 from -20.7 in January, having also risen in that month. The February figure was in line with economists' expectations. The pickup in consumer confidence adds to some recent signs that the euro-zone economy may have stabilized in the early part of 2012, having contracted in the final three month of last year by 0.3%. However, economists said the small rise in the overall measure likely reflects a pickup in Germany, which has seen a steady decline in the unemployment rate, and may not be widespread."

Changes to jobless benefits could help the long-term unemployed, reports Annie Lowrey: "Tucked into a $140 billion bill extending emergency jobless benefits and a temporary cut to payroll taxes are several provisions intended to modernize the country’s outdated unemployment insurance system. Experts described the little-noticed changes as marginal improvements, but important ones, and said they promised to aid the long-term jobless and help hold down the unemployment rate in future recessions...The bill, which passed Congress on Friday and President Obama has said he will sign, allows states to use unemployment insurance money for programs that help move the jobless back into the work force. Such programs, like Georgia Works, often offer employers wage subsidies for taking on and retraining jobless workers."

Christy Romer wanted an even larger stimulus option, reports Noam Scheiber: "Now, based on reporting I’ve done for my forthcoming book on the Obama administration, I can fill in a major gap in the narrative--an earlier version of the same memo that includes Romer’s larger option. In this version of the memo, Romer calculated that it would take an eye-popping $1.7-to-$1.8 trillion to fill the entire hole in the economy--the 'output gap,' in economist-speak. 'An ambitious goal would be to eliminate the output gap by 2011-Q1 [the first quarter of 2011], returning the economy to full employment by that date,' she wrote. 'To achieve that magnitude of effective stimulus using a feasible combination of spending, taxes and transfers to states and localities would require package costing about $1.8 trillion over two years.' Alas, these words never made it into the memo the president saw. "

The tax code doesn't follow basic principles, writes Bruce Bartlett: "It is clear that the rising inequality of wealth and income and how the wealthy should be taxed will be major issues in the political campaign...One problem that undoubtedly will arise is how to generalize about any particular income class’s tax burden. As I pointed out last week, tax burdens depend a lot on how one defines 'income.' In particular, the tax law makes a sharp distinction between income earned through wages and salaries, sometimes called 'earned' income, on the one hand, and income from capital, or 'unearned' income...We can see, then, that the tax system in the United States violates the fundamental principles of income taxation. Those are 'vertical equity,' which says that those with upper incomes should pay a higher effective tax rate than those with modest incomes -- as far back as Adam Smith, ability to pay has always been a core principle of taxation -- and 'horizontal equity,' which says that those with roughly the same income ought to pay roughly the same taxes."

Short film interlude: A New York City man's home and his collection of antiques.

Health Care

The FDA approved using imports to ease a shortage of cancer drugs, reports Gardiner Harris: "Dire shortages of two critical cancer drugs -- shortfalls that have threatened the lives and care of thousands of patients -- should be resolved within weeks, federal drug officials said. The two drugs are Doxil and methotrexate, and in both cases supplies in the United States are being bolstered by shipments from abroad. Shortages of scores of other drugs continue...There is a years-long backlog of applications for new generic drugs at the F.D.A. because the government does not have the money to hire enough reviewers to analyze the applications or inspectors to visit the facilities, many of them abroad. The generic drug industry tired of waiting for Congress to fully finance the F.D.A.’s generic drug office and this year proposed providing the agency with $299 million in annual fees to finance the review process."

Domestic Policy

Online privacy regulations continue to be elusive, report Keith Perine, Michelle Quinn and Elizabeth Wasserman: "Congress has been mulling general online privacy laws for longer than Google and Facebook have been dot-coms. But none has passed muster...There are several reasons for the absence of a broad online privacy law in the U.S., although the European Union has passed strict protections on how companies can collect and use consumer data, and U.S.-based companies have to comply with these laws in the EU. Just as technological advances have made it easier for companies like Google to track people online, they have also allowed firms to prosper by offering an ever-expanding list of cool, convenient ways for people to share data and get information...When it comes to data privacy, a lot of people would say they are for it in the abstract. But most of them would also have to admit that they’re willing to trade their privacy in exchange for the ability to look up the nearest Italian restaurant or stay in touch with their high school friends."

Private pensions could cost the federal government, reports Josh Boak: "Federal officials have assumed responsibility for hundreds of troubled pension plans in recent years. Those takeovers could accelerate as baby boomers start to retire, with taxpayers potentially needing to pay tens of billions of dollars to keep the private plans alive...For many of the 44 million Americans with pensions, employers have not set aside enough money to provide them a stable income through retirement. Publicly traded companies face a combined pension shortfall of $458 billion, according to a recent report by the bank Credit Suisse. The cost of rescuing these plans has saddled the federal Pension Benefit Guaranty Corp. with a $26 billion deficit, the highest in its 37-year history. The situation will likely worsen as more companies decide they can no longer afford their pension commitments and stick the government with the bill."

The Supreme Court will take up affirmative action again, reports Adam Liptak: "In a 2003 decision that the majority said it expected would last for 25 years, the Supreme Court allowed public colleges and universities to take account of race in admission decisions. On Tuesday, the court signaled that it might end such affirmative action much sooner than that. By agreeing to hear a major case involving race-conscious admissions at the University of Texas, the court thrust affirmative action back into the public and political discourse after years in which it had mostly faded from view. Both supporters and opponents of affirmative action said they saw the announcement -- and the change in the court’s makeup since 2003 -- as a signal that the court’s five more conservative members might be prepared to do away with racial preferences in higher education. The consequences of such a decision would be striking."

Interspecies friendship interlude: A cat gives a sleeping dog a massage.

Energy

Hydrogen fuel cell technology is falling out of favor, reports Matthew Wald: "In the 1980s and ’90s, hydrogen fuel cell technology seemed like a strong candidate for use in cars and stationary applications, converting hydrogen to electricity with no emissions beyond a puff of antiseptic water vapor...In 2008, the possibilities for fuel cells looked better than ever, when the nation elected a president who called for an 80 percent reduction in carbon dioxide emissions by midcentury, with strong interim goals and reductions to start 'immediately.' But the Obama administration’s energy research effort, led by Dr. Steven Chu, a Nobel laureate in physics who became secretary of energy, took a long hard look at all the possibilities, including conventional batteries, and liquid fuels that would have smaller 'carbon footprints' because they were made from renewable sources. And it decided that fuel cells did not look promising, compared with other new technologies, and that funding should be cut."

Lawmakers are still pushing for an extension of tax breaks for wind power, reports Alex Guillen: "Some Democratic and Republican lawmakers still aren’t giving up on extending the wind production tax credit, which expires at the end of the year. Supporters had hoped an extension could be included in the payroll tax cut deal that cleared Congress on Friday, probably the last must-pass bill of the year. Now they’re looking for other opportunities...Although the credit expires at the end of the year, advocates said the long time needed to plan, permit and construct wind projects means it is essentially expiring right now...Extension efforts also got a boost from the conservative U.S. Chamber of Commerce. The credit’s uncertain future is bad for business, the chamber’s tax policy director testified to a Senate committee earlier this month."

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

 
Read what others are saying

    Most Read: Business

    DJIA
    0.98%
    S&P 500
    1.56%
    NASDAQ
    1.76%
     Last Update: 12:42 PM 10/21/2014

    World Markets from      

     

    Other Market Data from      

     

    Key Rates from