Reading the Tax Reform Tea Leaves

September 07, 2012

Howard Gleckman at the Tax Policy Center is right to point out that both candidates failed in their convention speeches to move the ball forward on tax reform.  Perhaps cataloguing the 250 some odd credits, deductions, and other tax expenditures in the tax code does not keep the crowd on its feet.   Still, there are unmistakable conclusions we can draw about the candidates positions and their likelihood of accomplishing tax reform.  Here are the relevant bits from Obama’s speech:

I want to reform the tax code so that it's simple, fair and asks the wealthiest households to pay higher taxes on incomes over $250,000 — (cheers, applause) — the same rate we had when Bill Clinton was president, the same rate we had when our economy created nearly 23 million new jobs, the biggest surplus in history and a whole lot of millionaires to boot.

(Applause.)

Now, I'm still eager to reach an agreement based on the principles of my bipartisan debt commission. No party has a monopoly on wisdom. No democracy works without compromise. I want to get this done, and we can get it done.

But when Governor Romney and his friends in Congress tell us we can somehow lower our deficits by spending trillions more on new tax breaks for the wealthy, well — (boos) — what'd Bill Clinton call it? You do the arithmetic. (Laughter, cheers, applause.) You do the math.

I refuse to go along with that, and as long as I'm president, I never will. (Cheers, applause.) I refuse to ask middle-class families to give up their deductions for owning a home or raising their kids just to pay for another millionaire's tax cut. (Cheers, applause.) I refuse to ask students to pay more for college or kick children out of Head Start programs to eliminate health insurance for millions of Americans who are poor and elderly or disabled all so those with the most can pay less. I'm not going along with that. (Continued cheers, applause.)

Like Romney, Obama’s only willing to specify the tax expenditures he would protect.  Obama likes the mortgage interest deduction and the child credit, while Romney likes the mortgage interest deduction, the charitable deduction, health and retirement benefits.  Fine.  Not really, it makes tax reform more difficult, but not impossible. 

It is Obama’s insistence on a higher top marginal rate that makes reform impossible.  He wants to raise the rate to 39.6 percent, Romney wants to lower it to 28 percent.  There is no way that the half of the population that pays income taxes will agree to both pay a higher rate and receive fewer credits, deductions, etc.  That is, the medicine of tax reform will only be swallowed with the sugar of lower rates.  This is precisely what happened in the 1986 reform, when the top rate was lowered to… 28 percent. 

Now, Obama could raise tax rates on the top 1 or 2 percent and cut them out of the discussion, but he’s proposing to leave everyone else’s rates at the same level (actually higher due to tax increases in Obamacare).  That leaves no constituency in support of tax reform, only us tax wonks. 

Quite simply, so long as we live in a democracy, tax reform will only happen in conjunction with lower rates. 

For more on tax reform and how the candidates compare, see my latest report.

Follow William McBride on Twitter @EconoWill

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