Wednesday, January 2, 2013

Revenue-Raising Tax Reform Still Probably Impossible

I'm inclined to agree with Ezra Klein's post today that liberals are failing to recognize that this week's fiscal cliff deal was actually pretty good for them

However, it seems to depend on there being a good chance of revenue-raising tax reform. That still seems very unlikely.

I've written about this before, but here's the problem, once again. Tax reform -- eliminating or reducing favorable tax treatments in exchange for lower rates -- is a nightmarish problem to solve under the best of circumstances. Revenue-neutral tax reform almost certainly creates marginal winners and solid losers, which means that tax reform legislation produces intense opposition and mild support. It's hard to pass bills under those conditions! Under normal conditions, revenue-raising tax reform is even worse; it probably tips some marginal winners into marginal losers. But under current conditions, revenue-raising tax reform starts out by losing at least several dozen, and maybe over 100, House Republicans who simply won't vote for anything that's called "tax increase." Even, as we saw yesterday, if you manage to get the votes to set it up as a "cliff" in which opposing it will just trigger some other tax increase.

And you'll have to do that. There's no way that you're going to have any kind of comprehensive tax reform ready in two or three months. So that means a deal involving a fail-safe to "force" Congress to actually raise some target revenue amount. Which means for starters, you're talking two revenue-raising votes -- one for the fail-safe as part of getting past the debt limit, and another when the tax reform bill is finally ready. That's already pretty tough.

But the real trouble is when you get to the tax reform bill. Because it will lose votes from Democrats who support higher revenues, and lose other votes from pragmatic Republicans willing to accept revenues in return for other priorities, you just aren't going to have enough remaining votes. Or at least the chances of having enough votes are very, very small.

Now, maybe that just means that we're stuck with the fail-safe, whatever that is, and assuming you can get the votes for that in the first place. Or maybe it means that (again assuming that the thing is passed in the first place) the revenue-raising tax reform bill fails, the fail-safe kicks in, and then the tax reform bill is redone as revenue-neutral from the higher baseline, and anti-taxers pretend to fall for it. But I just find it very hard to believe that the revenue-boosting tax reform bill gets anywhere. More likely, you wind up with Republicans insisting that lower rates pay for themselves, and Democrats sticking with neutral projections, and no way to bridge the difference. For liberals, it's very easy to see a trap in which the two sides compromise on a halfway point between real revenues and imaginary ones, yielding a bill which actually winds up raising half the revenues they originally voted for (although it would be tough for even that to pass, since it still has the same problem as a larger revenue-raising bill).

The only way that revenue-raising tax reform could be at all useful would be if there are some Republicans who wouldn't vote for plain-vanilla new revenues to get past the debt limit/sequester deadline, but would vote for revenue-raising tax reform backed up by vanilla-ish tax increases. I don't think that group exists, but maybe it does.

But otherwise, I just don't see how it's going to happen. Raising taxes is hard enough, but doing it through tax reform makes it harder, not easier.

10 comments:

  1. It's impossible to tell whether the deal was good or not until we see the 2nd part of it that deals with the sequester and the debt ceiling. If the tax giveaways in this week's deals are combined with chained CPI for Social Security, a higher Medicare age, no permanent disarming of the debt ceiling hostage-taking, and other desired conservative outcomes, it will be a very bad deal.

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    1. so far its being reported that the 2nd part contains over 76billion in corporate giveaways for this year

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  2. How can you agree with Ezra if you don't think new revenue can be obtained?
    While comprehensive tax reform can't be done quickly, or maybe be made revenue-positive, what about Obama's 28% cap on the value of deductions? That would've raised $600b/10 years if the top two income tax brackets had been raised; now, maybe it would raise $4-500b. I admit it's unlikely that GOP would agree, but it seems a likely locus for Obama's ask.
    Frankly, I have a hard time imagining the GOP acceding to any new revenue. And that's really the hard part re taking comfort from Ezra's detailed argument.

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    1. I guess what I'm saying is that my instinct is to agree with Ezra, but I can't see this part of it working.

      OTOH, I can see them giving up on both new revenues and any new cuts, revamping the sequester to include smaller defense cuts, similar but more targeted domestic cuts, and some fudged not-real cuts (so that the headline number looks like the same size as the sequester). That's hardly great for liberals, but depending on what the cuts would be it's not necessarily all that bad.

      Trick is if given the choice between that, most cuts plus revenues, or defaulting the country, what GOP would go for.

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    2. I do not think that JB is saying new revenue is not possible. He is saying he doubts it can be done as part of any scheme that closes loopholes while lowering rates. In other words, no grand bargain is possible. Anything that happens will have to be another minimal, get us past the crisis, fix.

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    3. Okay, what you said, JB.

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    4. Yes, I also don't understand why Klein doesn't have an option 4 (like you said), where we just come up with another stupid gimmick to knock the debt ceiling problem back like in 2011. Also as we saw with the cliff how does any deal become law without the Dem Senate and Dem's in the House just like the deal with the cliff? Any deal that liberals are afraid as being really bad strikes me as being a deal that couldn't get Dem support in Congress, especially the sport of Pelosi. Since I'm really doubtful that a deal that has large spending cuts and a short term debt ceiling increase and nothing else will get any liberal support, I don't see how it gets passed even if Obama is on board.

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  3. If I'm reading Klein correctly, his argument essentially boils down to "well, we've given in on all the previous negotiations, so the GOP is SURE to take that into account and be nice to us in the next one! Oh, and since this agreement raised the amount of taxes people pay, it counts as a tax increase, therefore, the GOP will agree to more tax increases, since we've just demonstrated that all that talk was bluster."

    All the liberals Klein was talking to were right: this deal is a turd. At this point, I really and truly regret my vote for Obama in the 2008 primary. Going over the cliff would have been a much better outcome. Taxes would have gone up....to a level liberals support! Defense spending would have been slashed. Yes, old people would have taken a hit, but the truth is that is going to happen without single-payer anyway. I much prefer Fiscal Cliff World to President Obama Negotiates "Deals" That Suck World.

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  4. This bill was supported by Pelosi and Reid, and commanded a majority of Democrats and Republicans. Thus, the claim that such a bill was decided upon because of Obama's weakness as a negotiator is unbelievable. If no deal was better from, a Democratic Party, perspective than this deal then Pelosi or the Senate would have killed it, as they killed Social Security cuts. I agree that going over the Cliff didn't seem that bad to me, but I'm further left than the median Democrat.

    Ezra is absolutely right that the real story here is that the refusal of Republicans to govern has effectively stripped them of their House majority. Boehner's willingness to punish his own party by passing a Democratic bill is amazing, and should hearten everyone on the left.

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  5. I don't understand the pre-emptive Republican bashing, implying that they are unwilling to raise revenues by closing loopholes or limiting deductions.

    Just over a month ago Repubs were proposing exactly that. If you don't believe me, believe the White House: http://www.whitehouse.gov/blog/2012/11/29/limiting-tax-deductions-reality-math.
    I don't recall Democrats rushing to support this.

    And it was only Republicans, at least a few of them, who opposed the special interest tax favors in the just-passed Cliff bill. (see http://online.wsj.com/article/SB10001424127887323320404578216583921471560.html?mod=WSJ_Opinion_LEADTop)

    So far, based on (admittedly limited) evidence, it is Democrats who oppose reform.

    For the record, I agree with you 110% that tax reform is necessary!

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