Obama could be the odd man out on tax reform
One of the services of the Simpson-Bowles Commission was to set out a path for tax reform, with lower income tax rates and removal of many tax preferences — or, to use the commission’s term, tax expenditures.
It’s an approach that has been tried before and worked. Ronald Reagan called for such a reform in 1984, and after much negotiating, it was hammered out in 1986. Lead roles were played by Treasury Secretary James Baker; the Democratic chairman of the Ways and Means Committee, Dan Rostenkowski; and the Republican chairman of the Senate Finance Committee, Bob Packwood.
It wasn’t easy work, and at one point it required an extra pitcher or two of beer at an Irish pub for Packwood and his staffers.
Mitt Romney has endorsed a similar procedure. So has Paul Ryan, who included it in the budget he steered to passage in the House.
Romney and Ryan have been criticized for not providing specifics on which tax preferences they would eliminate.
But neither did the Simpson-Bowles Commission, which said “the precise details and exact transition rules should be worked out in a variety of ways by the relevant congressional committees and the Treasury Department.” That’s how it worked in 1984-86.
And at least some of the relevant congressional players have been working at it already. Ways and Means Chairman Dave Camp has been working the numbers and says he will be ready to advance a proposal next year if, as seems likely, Republicans hold their House majority.
Sen. Orrin Hatch, who will be finance committee chairman if Republicans win a majority in the Senate, says he is ready to move, too. He says he has a good working relationship with the committee’s top Democrat, Max Baucus.
Baucus has been willing to work on bipartisan proposals in the past, especially when he is about to face the voters in Republican-leaning Montana. He supported the 2001 Bush tax cuts when his seat was up in 2002, and it’s up again in 2014.
Those criticizing Romney and Ryan for being unspecific point out, correctly, that the tax preferences whose abolition or limitation would produce the most tax revenue are widely popular. There was little support on either side of the aisle for an Obama proposal to further limit the deductibility of charitable contributions, for example.
But people may be ready to limit the home mortgage deduction. Rude events have shown us that the tax code confers an outsize benefit to people who buy homes.
Encouraging home ownership sounds like a worthy goal. But do we really have to allow full deductibility of a $1,000,000 home mortgage to do so? Anyone who can qualify for a loan that size will probably want to buy in any case.
And why should mortgages on second homes be deductible? Simpson-Bowles explicitly put that on the table.
Then there’s the deduction for state and local taxes. This is a subsidy for high-spending states and cities and for the public employee unions that rule the roost there.
High earners in such states have been voting Democratic for most of the last 20 years. Evidently they don’t mind paying higher taxes.
Republicans, including Romney and Ryan, have explicitly endorsed extracting more revenues from high earners who, they point out, benefit disproportionately from such deductions. They just don’t want tax rates to go up because that works against job creation.
The biggest obstacle to 1986-style tax reform is Barack Obama. In his acceptance speech, he reiterated his call for higher tax rates on high earners.
That’s as much of a deal-killer for Republicans as his late-in-the-day insistence on $400 billion in additional revenues in the August 2011 grand bargain negotiations, documented once again in Bob Woodward’s “The Price of Politics.”
Obama also said he wouldn’t agree to limit the home mortgage deductions for “middle class families.” That could be a deal-killer too.
Republicans will never agree to higher tax rates because the last Republican leader to do so, the first George Bush, wound up getting 37 percent of the vote. Demanding that they do so makes any bipartisan solution impossible.
Other Democrats seem more flexible than Obama. Virginia Sen. Mark Warner spoke approvingly of a Simpson-Bowles tax reform in the Democratic National Convention in Charlotte, N.C. Tennessee Rep. Jim Cooper has endorsed the whole Simpson-Bowles report.
Woodward reports that during the grand bargain negotiations, congressional leaders of both parties voted Obama “off the island.” Voters who want Simpson-Bowles-type tax reform can do that in November.