Don’t be fooled. Republicans and Democrats mean different things when they talk about tax reform. Republicans are much more interested in lowering rates than in closing loopholes. During his presidential campaign, Mitt Romney said he would slash individual income tax rates by 20 percent across the board but was noncommittal about what tax breaks he’d scrap. When Obama says he’s for tax reform, he’s talking about limiting the value of deductions for the wealthy to 28 percent of their income. He has yet to propose lower tax rates and wants to raise them for the top 2 percent.
The two parties also have different ideas about which loopholes to eliminate. Obama, for example, wants to cap, but not eliminate, the tax break for charitable giving. His stimulus expanded the tax credit for college education, and he wants to make that permanent. Republicans generally want to protect lower rates for capital gains and dividends.
2. Eliminating tax breaks could raise more than $1 trillion a year in revenue.
To prove that there’s plenty of money available to lower rates, tax reform advocates such as the bipartisan Simpson-Bowles deficit commission often cite the annual cost of tax breaks as $1.1 trillion. One study by the nonpartisan Congressional Research Service (CRS) estimated that eliminating all those tax breaks would generate enough revenue to lower the top rate from 39.6 percent to 23 percent.
But that same study noted how hard that would be. Most people benefit from some kind of tax break, making them very popular. Ending them would be administratively difficult and politically treacherous. Some are part of the social safety net, such as the earned income tax credit and the child tax credit, which benefit lower-income workers and families, as well as the exclusion of most Social Security benefits from taxation, which helps the elderly.
Other breaks encourage things most Americans approve of: charitable giving, saving for retirement and homeownership. The mortgage-interest deduction cost $75 billion in foregone tax revenue in 2011, but it’s also immensely popular — 33 million households claimed it, according to the nonpartisan Tax Policy Center. Real estate agents, home builders and mortgage bankers would fight fiercely to preserve it.
After considering all these constraints, the CRS study concluded that it would be hard to gain more than $150 billion a year by eliminating tax breaks.
The 1986 tax overhaul is a good road map for reform.
“There’s a model for tax reform that supports economic growth,” Boehner said recently. “It happened in 1986, with a Democratic House run by Tip O’Neill and a Republican president named Ronald Reagan.”
Unfortunately, the very success of that act limits its use as a model. Reagan’s priority was to lower the top income tax rate, and he succeeded, bringing it to 28 percent from 50 percent. That option is no longer on the table; Obama has all but ruled out lowering the top rate. The only question is: Will it go up, and if so, by how much?