Here's hoping that Karl Rove hangs around the White House, at least through next year. The reason: tax reform.
The conventional wisdom in Washington has been that the recommendations of the president's tax reform panel, delivered this week, would be politically dead on arrival. But those naysayers never bothered to wait and actually read the 271-page report, which turns out to be nothing short of brilliant. It is grounded in sound economics, not ideology, and in addition to being intellectually honest and consistent, it is creative and bold. The commission's recommendations are based on political trade-offs carefully designed to build a constituency for reform. And as a piece of policy prose, it is clear, well reasoned and convincing.
If Democrats were clever, they'd embrace the recommendations as their own and dare the president to join them. Since they're not, we're going to need someone as smart and cunning as Rove to push the program through.
In the coming months, you'll hear lots of bellyaching that this or that recommendation would "discourage" certain behavior or "hurt" certain groups of people or companies. Pay no attention to such rubbish. The whole idea behind tax reform is getting the government out of the business of encouraging or discouraging any activity, however worthwhile. To the extent that this "tax neutrality" hurts anyone, the pain consists of losing the right to continue picking the pockets of other taxpayers.
We've already heard from a number of the losers, such as the life insurance industry, which is really nothing more than tax shelter wrapped around lousy investment returns. Also warning of calamity are the real estate, health insurance and higher education industries, which won't be able to push through outsized price increases once the mortgage deduction, the tax-free status of fringe benefits and the college tuition credits are cut back.
You'll also hear complaints about the "unfairness" of the reform plan (actually, there are two similar and complementary plans). Not true. In fact, using either of the usual yardsticks of tax fairness, they are a better deal than the current system.
The first kind, "vertical" fairness, is just a fancy word for progressivity: Does the tax code impose a higher tax burden, percentage-wise, on the rich than it does on the poor? A Treasury analysis concludes that the commission plans would keep the combined income and corporate tax codes about as progressive as they are now. That's no coincidence: The politically savvy commission fashioned its proposals to come out that way.
Just as important, however, is "horizontal" equity: Does the code impose roughly similar tax burdens on people with similar incomes? In this respect, the current system is far from ideal. Because of all the deductions and credits in the current code, taxes paid have as much to do with how you earn, spend and invest your money as with how much you earn. By reducing the number and size of these preferences, and making the most popular ones available to taxpayers who do not now itemize deductions, horizontal disparities would be significantly reduced under the reform proposal. As a result, roughly two taxpayers would enjoy a reduction in taxes for every taxpayer that has to pay more.
Although the proposed changes in the individual income tax have drawn the most attention, it is the simplification of the corporate income tax that could prove even more radical. Expensing of depreciation. Wiping out virtually all those special tax breaks corporate lobbyists have spent the past 20 years creating. Similar tax regimes for corporations, partnerships, S-Corps and LLPs. Closing down the Bermuda tax dodge. Similar treatment for interest and dividend payments, which eliminates the incentive to finance businesses with debt rather than equity.
To its credit, the commission refrained from making overblown claims about the boost to economic growth that would come from reducing the taxation of income from savings and investment. But there is no doubt the economy would benefit from tax changes that increase retirement saving by workers, level the playing field for U.S. exporters and encourage U.S. multinationals to reinvest their foreign profits back home. Those would help chip away at the large and still-growing U.S. current account deficit, which remains the biggest threat to the U.S. and global economies.
The only real problem with the tax panel's proposal is not how it would raise revenue, but how much revenue it would raise: the same as the current tax code, with the Bush tax cuts made permanent. No matter how you figure it, that won't come close to getting control of the federal budget deficit. But that's a column for another day.
Steven Pearlstein can be reached at email@example.com.