Six reasons why tax reform won’t happen


Max Baucus' last stand. (Chip Somodevilla/GETTY IMAGES)

After months of lawmakers dancing around the subject--holding preliminary hearings, floating proposals--it appears that tax reform is getting started in earnest. As evidence that it can actually finally get done, some are pointing to the last time Congress managed to pull off a major overhaul: The Tax Reform Act of 1986. The New York Times held it up as a model. House Speaker John Boehner harkened back to "the 1986 experience." A business group says the current divided government and desire to close loopholes and lower overall rates means it's time to "party like it's 1986."

But how similar is the situation today, really? There are a few key differences--many of which make tax reform harder to accomplish.

1. The revenue question. In the early 1980s, even the most widely varying tax proposals shared a common precondition: They would be revenue neutral, closing loopholes and simultaneously lowering the overall corporate tax rate, rather than generating cash that could be used to support infrastructure and plug holes in federal budgets. Today, there is no such sympatico. Republicans want to see taxes stay low and "broaden the base," while progressives insist we should use tax reform to generate revenue and lower deficits. This fundamental disagreement lies at the root of most fiscal standoffs in Washington these days, and there's little reason to think comprehensive tax reform will be any different.

public opinion about the income tax
We've gotten less frustrated about the income tax. (Gallup)

2. Public opinion. Momentum on tax reform will require sustained public dissatisfaction with the status quo. And as screwed up as we might think the tax system is today, it was a lot worse three decades ago: The code hadn't been overhauled in more than seventy years, and was so weighed down with special interest tax breaks that the Treasury forgave nearly as much money as it collected. The public knew that, and more than sixty percent was unhappy with the personal income tax rate. "The reason it succeeded, ultimately, was that the public was so outraged by the condition of the tax code they didn't trust it anymore," remembers BGR Group's public relations chief Jeffrey Birnbaum, who wrote the classic account of Reagan-era tax reform, Showdown at Gucci Gulch. "At least there was fear among the electeds that if they didn't pass something they could call tax reform, they would be penalized by an angry electorate."

Today, only 50 percent of Americans are unhappy with income tax rates. While some polling indicates that people are now open to raising taxes on the rich, the current draft proposal actually lowers the top tax rates on individuals, so it's not clear that will help.

On the other hand, "simplification" is an argument that will likely resonate with taxpayers.  "Tax law complexity is a much more significant factor in 2013," writes David Kautter, of American University's Kogod School of Business. "Currently 60 percent of individual taxpayers hire a tax return preparer and 31 percent use software, while 90 percent of all small businesses use a tax return preparer. Those numbers are much higher than in 1986." Plus, he says, a weaker economy could better the chances of reform if it's positioned as a necessary step to create jobs.

3. Process. Tax reform's dynamic duo, Sen. Max Baucus (D-Mont.) and Rep. David Camp (R-Mich.), have already broken with the way in which the framers of the 1986 bill went about their business. Instead of offering a full-blown bill up front, as Rep. Dan Rostenkowski's Ways and Means committee did in 1985, they've opted for a "blank slate" approach, asking for all special interests to come in and justify their inclusion in a new bill. It's kicked off a lobbying frenzy, with industries frantically finding a senator to advocate on their behalf. That could help the tax re-writers objectively weigh each tax expenditure against the rest, but it could also produce an immediate stalemate before a plan even gets off the ground.

Screen-Shot-2013-06-05-at-4.33.26-PM
It's gotten a lot harder to pass bills since 1986. (James Moody of Duke and Peter Mucha of the University of North Carolina)

4. The partisan chasm. "Reform" means entirely different things to different people (see point #1). While Camp and Baucus represent a chummy bipartisan front, full of burgers-and-beer bravado--and both have strong incentives to pass a bill before they lose their chairmanships through retirement and term limits respectively--political will inevitably breaks down on the fringes. The Congress of 2013 is a much more polarized place than it was in 1986, weakening the odds of success even further.

5. Bigger sticking points. As Apple CEO Tim Cook's appearance before a Senate committee last month illustrated, keeping corporate income within the U.S.' borders--and taxing it--will be a huge challenge. It's probably a thornier issue than the relatively minor tax shelters Congress had to deal with three decades ago, when multinational companies weren't so dominant, and capital so global. Obama has indicated some openness to a territorial tax, which Cook and Republicans have pushed for. But creating one that doesn't lose the Treasury a lot of revenue is no easy matter. "If you have a territorial system, the United States won't get its fair share of taxes," says Andrew Pike, of American University's Washington College of Law. "You can have a territorial system, but it can't be all that simple."

6. Where's Obama? Though he didn't campaign on it, Ronald Reagan came to make tax reform the signature issue of his second term, lobbying for his own proposal in Congress and barnstorming the nation to tell people why it was necessary. "Tax reform is a drama with heroes and villains and a damsel in distress," Reagan said in rural Tennessee in 1985. "The heroes are the citizens across this country who are asking for tax justice. The villains are the special interests--the 'I got mine' gang. And the damsel in distress? A lass named Endless Economic Growth, who's tied to the tracks and struggling to break free."

Barack Obama hasn't pulled out the soaring rhetoric yet, and he'll need to in order to get a plan passed--not to mention push it forward even when it looks completely dead, with a level of determination we haven't yet seen on any other legislative campaign. Lately, he's been trying to go around an intransigent Congress rather than through it. This time, that strategy won't work.

Of course, very few people thought comprehensive tax reform would happen in the 1980s, either. This one will take an even bigger miracle.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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