Monday, June 25, 2012

Only Revenue-Neutral Tax Reform Has a Chance

CBPP's Chuck Marr and Chye-Ching Huang published a paper earlier this month arguing that some proponents of tax reform are going about it all wrong; in particular, they argue, tax reform must raise revenue.

I agree very much about the sequencing of tax reform -- Jared Bernstein explains their argument about that. Paul Ryan's method, which involves first specifying the tax rates in the final plan and only after that worrying about which expenditures to eliminate is in fact a "trap" likely to deliver much lower revenues -- or, perhaps, just making a final deal relatively impossible to achieve.

But if Marr and Huang believe that "today, revenue neutrality would be harmful" in tax reform, than what they really should be saying is that now is the wrong time for reform. Because there's simply no chance for revenue-positive tax reform to pass in the foreseeable future.

Why? It's the nature of tax reform. The reason that reform is appealing is that it promises to be a net positive: a tax code which treats all (or at least more) income the same is going to be more economically efficient than one that makes all sorts of exceptions and therefore gives all sorts of oddball incentives. The reason reform is very difficult is because there are clear losers: everyone who specifically benefits from provisions in the current code loses if those provisions are eliminated. And it's pretty simple to see the political problem this causes -- the result of how the gains and losses are distributed produces relatively indifferent proponents of change against intense minorities against change. That's a formula in the US political system for stalemate.

What's more, the main vehicle for overcoming such problems, the political parties, are highly unlikely to help. Neither party has tax reform as anywhere close to the top of its priority list. Nor are they likely to do so. Partially that's because tax reform is generally by nature a technocratic, not an ideological, goal; partially it's because no party constituency is likely to have it at the top of their list precisely because the benefits are widely shared.

What all of that means is that tax reform is that it's no surprise that the last time tax reform happened it was not only during a period of divided government, but well into such a period, when partisan stalemate was well-established and promised to go on for some time (as, indeed, it did).

All of which means, in my view, that a status quo election (that is, Barack Obama is re-elected and Republicans retain the House) probably does make conditions good for tax reform.

But not revenue-positive tax reform. Tax reform is hard enough as it is; doing it while violating the core principle of one of the parties makes it absolutely impossible. And make no mistake about it; avoiding any tax increase is a core GOP principle. Insisting on revenue-positive tax reform immediately makes eventual support from mainstream conservatives almost impossible, and there's just no way you get it without them. The truth is, even if the relatively moderate mainstream conservatives were willing to consider it (which in my view is unlikely), you just can't go into something like this without at least the potential support of every ideological faction -- because you go in knowing that you're going to lose support from those representing whatever discrete interests wind up the losers.

What I do think that liberals should demand of tax reform, and where I agree with these pieces, is that revenue-neutral tax reform should also produce a code at least as progressive as what exists now -- and one that generally helps, not hurts, with the problem of income inequality. Or, to put it another way: for liberals to insist on anything is to declare that goal to be an ideological priority. And neither balanced budgets nor increased revenues for their own sake are liberal ideological priorities, but dealing with income inequality surely is.

And if tax reform would make budget problems worse, and that's more important than the benefits of reform? Then it's not time yet for reform.

The bottom line is that tax reform is almost impossible to begin with; tax reform that going in is going to be a far harder lift for either of the parties (that is, for the Republicans if it increases revenues or for the Democrats if it increases inequality) does make it impossible.


  1. Isn't a big part of the problem that neither side trusts the other to avoid trying for a "stealthy" tax cut/hike?

    Lots of complex tax policy issues would be simplified if both sides could agree on how "revenue neutral" is defined and on what the level of revenue should be. But it's not clear that this is achievable in the current political climate.

  2. Can you expand on how targetted tax incentives aren't economically efficient? Is that generally speaking, or nearly universally?

    It's not that I'm not inclined to buy that (I am), but I can't claim enough economics to be sure that it's true.

  3. I would love to see some nervy Democrats propose a tax reform bill that simplifies the tax code by treating all income alike. Let's tax ordinary income, capital gains, inherited income, corporate income, everything by the same rates, and we could probably lower those rates. Who could object to that?

  4. What if the Dems/Obama allow the Bush tax cuts to sunset and then try to tackle tax reform in the next session? This re-establishes a higher revenue baseline, and revenue neutral or even negative revenue tax reform would be palatable to liberals.

    Doubt this will happen, but it seems like one feasible way around the problem JB describes.

    1. Right.

      Once the Bush cuts expire, everyone will agree we need cut taxes. They can do an overhaul, give everyone a cut, and still bring in more revenue than we get now.


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