Starting the tax conversation
COULD 2011, OR 2012, be a 1986 moment? In other words, has the confluence of worries over the debt and bipartisan disdain for the existing byzantine edifice known as the tax code opened the way for fundamental reform? President Obama said last week that he believes so - and wants to use the next two years to push for such an overhaul. "We've got to start that conversation next year," he told National Public Radio. "I think we can get some broad, bipartisan agreement that it needs to be done. But it's going to require a lot of hard work to actually make it happen."
Just how hard was clear from the president's next words, when Morning Edition host Steve Inskeep referred to the plan put forward by Mr. Obama's fiscal responsibility commission, which would eliminate or limit numerous popular deductions, such as those for home mortgages. "Well, I have not specifically endorsed that plan," Mr. Obama was quick to say. "What I'm saying is, is that the general concept of simplifying - eliminating loopholes, eliminating deductions, eliminating exemptions in certain categories - might make sense if, in exchange, people's rates are lower. "
If the president is truly committed to driving a national debate about tax reform, we applaud him for it. As the tax reform panel appointed by President George W. Bush demonstrated, even a tax overhaul that did not raise a single dime in new revenue could produce a system that is fairer, more efficient and, therefore, better for economic growth. But as the Bush tax reform panel also demonstrated, tax reform proposals - especially those that take on heavily-defended deductions such as those for mortgage interest or employer-sponsored health insurance - go absolutely nowhere without a sustained political push.
And the tax reform that is called for now will be more difficult than that of 1986, for the simple reason that the 1986 reform was revenue-neutral. The nation's perilous fiscal condition requires, in addition to spending cuts, a tax code that brings in more money. Unlike the president's preferred approach of extending the Bush tax cuts for households making under $250,000, his fiscal commission's plan would raise more than $1 trillion over the next decade.
There are many positive aspects of the commission's approach. It would replace the current six tax brackets with three rates: 12, 22 and 28 percent. It would tax capital gains and dividends as ordinary income, reducing the current gaming of the system for tax advantage. It would reduce the corporate tax from 35 percent to 28 percent while pruning corporate loopholes. It would keep in place tax help for the lowest-income workers while eliminating hundreds of billions in other tax deductions and reforming others. For example, mortgages entitled to preferential tax treatment would be capped at $500,000, instead of the current $1 million, and limited to the primary residence.
There are also major questions about the plan, perhaps most important whether it raises enough revenue to get the debt down to a sustainable level. And this is where Mr. Obama's comments, however preliminary, are slightly concerning. It would be relatively easy to sell tax reform as a simpler system with lower rates. But tax reform worth doing means that taxpayers will pay more. Mr. Obama might not want to lead with that unpleasant fact, but he will have to confront it as part of the hard work that lies ahead.