Norman Ornstein says that he is for tax reform, but he proposes that we wring our hands for a while before acting on it "Wait a Minute. Tax Reform Could Be Painful." op-ed, May 14 . Then he parrots every special interest line that we have heard since tax reform became a live prospect four years ago.
Everybody knows that tax reform requires giving up tax "breaks" to get lower rates in return. Everybody knows that the tax breaks are used by just about everyone, but the lion's share of the benefit goes to a select few. And almost everybody agrees that after some short-term pain, the economy will be better off without the loopholes. We don't need another encore from the special pleaders; we need to get on with the job.
Lest anyone fear that Ornstein has uncovered some hidden gremlins in tax reform, let's look at his menagerie and see how tame it is.
Most of the horror stories about tax reform involve housing; if you want to keep your tax loophole, whatever it is, you try to "hit 'em where they live." For the homeowner, Ornstein paints the picture of a $1,000 monthly mortgage interest bill, which is implicitly equal to $600 after the benefit of tax deductibility in the 40 percent tax rate bracket. After the applicable tax rate is cut to 27 percent in the Senate Finance Committee bill, the implicit after-tax cost is $730. Though this taxpayer gets a tax cut of $300 (and the changes in the after-tax mortgage costs are only concepts, not actual expenditures), Ornstein says he is a "loser," because a prospective buyer of his home will look at the implicit after-tax mortgage cost and offer a lower price.
Let's think about this one. Our hypothetical prospective buyer of the house, in all likelihood, receives a tax cut -- just like the homeowner in Ornstein's example. He gets to keep more out of his next pay raise, because he is in a lower tax bracket. So he has more money to spend. And the prospective buyer can buy the house and still pay less tax under the committee bill than he would under the current law (assuming his circumstances are the same as the current owner's). Will he really offer less to buy the house? Possibly. But the margin, if any, will be small compared to the routine effects of fluctuations of inflation and interest rates.
Ornstein dusts off another housing scare story, this one for renters. Lobbies of apartment owners claim that tax reform would cause astronomical increases in rents, which the lobbyists assume would be large enough to make up for the loss of their tax loopholes. Let's think about that one. If the landlords really believe they can increase rents enough to make up for the loss of their enormous tax breaks, why are they bothering to spend so lavishly and lobby so vigorously to defend the loopholes? Over many years, slower apartment construction may lead to somewhat higher rents, but the current stock of apartment buildings and the current level of rents will change little, if at all.
If you can't scare them on housing, how about college? Ornstein trots out the fear that tuitions will rise because wealthy donors will give less when tax rates, and the corresponding tax savings from charitable contributions, go down. Let's think about that one. Most wealthy taxpayers, like everyone else, will get tax cuts even at their current levels of charitable giving; and they will keep more of any additional income they earn, because tax rates will be lower. Do you really think that wealthy people -- who would have more money in their pockets even if they maintained their contributions, would reduce their gifts to the charities they already support? Some sophisticated economic research does suggest that charitable contributions would fall if tax rates were cut. But such research could easily misjudge a complex of circumstances that increased the after-tax cost of a donation and made the donor better off at the same time.
Ornstein's last stand is his claim that repealing tax loopholes is "a unilateral disarmament on the part of the federal government when it comes to dealing with domestic issues and problems. . . . Dramatic tax reform strips the tax system of most of its powers for solving problems." Ornstein should remember that the tax subsidies and incentives that the Finance Committee bill would repeal do not solve problems; they pursue obsolete goals, or incur several dollars of cost for every dollar of results. Throwing money at problems through the tax code makes no more sense than through government spending.
Ornstein is right when he says that "the tax system is the embodiment of the American status quo," and that government routinely guards against dramatic change. But government should pursue the common good, by quantum change if need be. The 20 members of the Finance Committee -- as diverse a group as you could find -- can see the overwhelming need for fundamental tax reform. Each can point out dozens of instances of short-term pain as a result of the bill; they, like their constituents, have heard the arguments of the lobbyists and felt the fear of the consequences of the repeal of this exclusion or that deduction. But each member understands that dwindling compliance with a respect for the current law, billions of dollars of economic waste in tax shelters and crying instances of unfairness between rich and poor demand action. The committee heard the arguments and chose to act. So should the Senate.