The Republicans have the opportunity, now that they joined in a deal allowing the top marginal rate on individuals to rise, to reset the argument on tax reform. As Douglas Holtz-Eakin writes, “The fiscal-cliff deal makes the 2001–2003 tax laws permanent for 98 percent of taxpayers, patches the AMT permanently, and makes clear that both sides of the aisle have embraced the virtues of lower taxes. That is not to say that all is perfect. The tax code remains in need of a fundamental overhaul to improve its international competitiveness (a lower corporate rate and a move to a territorial tax system), growth incentives, and the appearance of fairness. And the messaging in favor of pro-growth tax policy is in bad need of refurbishment.”
The notion that taxes were never going to increase on anyone for any reason at any time proved to be unsustainable. Republicans acknowledged they had the votes only to protect 99 percent of the Bush tax cuts. Democrats enthusiastically socked it to working Americans by ending the payroll tax break. President Obama’s favorite talking point has been that Republicans want to “give” tax breaks (that means allow to people keep their money) to billionaires at the expense of Grandma’s health care and college kids’ tuition. It has been significantly weakened. Republicans now can craft a tax-reform message that is populist, pro-jobs and pro-fairness.
They can start with undoing the mass of corporate giveaways they just passed, as well as a slew of other corporate and individual tax breaks. The Wall Street Journal editorial board details the panoply of gross gimmicks and giveaways tucked into the “fiscal cliff” deal for the benefit of those with adept lobbyists (e.g., Nascar owners, rum distillers, Hollywood producers, green-energy moguls), concluding:
The great joke here is that Washington pretends to want to pass “comprehensive tax reform,” even as each year it adds more tax giveaways that distort the tax code and keep tax rates higher than they have to be. Even as he praised the bill full of this stuff, Mr. Obama called Tuesday night for “further reforms to our tax code so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans.”
One of Mr. Obama’s political gifts is that he can sound so plausible describing the opposite of his real intentions.
The costs of all this are far greater than the estimates conjured by the Joint Tax Committee. They include slower economic growth from misallocated capital, lower revenues for the Treasury and thus more pressure to raise rates on everyone, and greater public cynicism that government mainly serves the powerful.
In short, Republicans need to emphasize the base-broadening and anti-cronyism aspects of tax reform, as well as the benefits of simplification for average taxpayers. If Republicans want to capture the “fairness” meme from the left and take the income-inequality issue away (the politically unconnected should not subsidize the K Street crowd), this is the place to start. If they want to appeal to Rust Belt voters, it is time to explain how the corporate tax code chases investors and employers out of the United States.
A final word about the prospect of tax reform: The Simpson-Bowles tax proposal managed to get to a top marginal rate for individuals beginning with a “2,” while wiping out a slew of credits and deductions. It also managed to generate more than a trillion dollars in new revenue for debt reduction. Republicans rightly feel they have given enough on the revenue side. But what would they be willing to consider to get a tax code with lower marginal rates and far less government interference in the economy? That consideration should be front and center as Republicans plot their next moves in the fiscal follies.