Whither Tax Reform? Chasing the Great White Whale
Laura Blessing | February 7, 2016
Tax reform, particularly genuinely comprehensive tax reform, seems to be the great white whale of American politics. Given that it tends to occur once a generation, the smart money is always on betting on the reform du jour failing. And yet, confident rumblings have yet again surfaced–from Speaker Ryan and Ways and Means chair Brady, among others. Last week, Chair Brady held the first hearing of 2016 on pro-growth policies, focusing on tax reform, and released a letter explicitly stating tax reform as a goal. How should we think of this latest fishing expedition?
Enduring Challenges for Tax Reform
Tax reform is particularly difficult to achieve—among other things, it involves overcoming the problem of concentrated costs and diffuse benefits. Historically, the biggest tax changes have emerged from crises, bellicose or economic. This does not describe the last major tax reform, in 1986, which has nevertheless left us with lessons on conditions for reform. (See CRS scholar Jane Gravelle’s 2014 piece on this, accessible here.) Strong Presidential leadership is essential to such efforts. The Obama administration has put forth reform proposals, but does not appear to be expending much political capital on them, perhaps sensing how unlikely success would be. Other factors include insulation from political pressures, strong congressional leadership, and effective messaging. Gravelle concludes that these factors are currently “largely absent”.
Current Political Complications
Current political factors provide additional context for tax reform’s hurdles. This complicates the above condition of being “insulated from political pressures”. Namely, the presidential election, as well as potentially intra-branch and intra-party divisions, play an outsized role. Comprehensive tax reform is a complicated task requiring extensive study—former Ways and Means chair Dave Camp’s 2014 proposal took him three years to put together, and the vaunted 1986 Tax Reform Act took two years to pass through Congress.
Each side has its sacred cows and its oxen to gore—which come with powerful constituencies that can be electorally salient. (Camp’s reform, lauded for its comprehensive nature and realistic revenue projections, was given the party priority designation of HR 1, but was nonetheless pulled from the floor for lack of support, with treatment of banks being a particular sticking point.) Members of Congress want to bolster their party’s nominee at the expense of the oppositions, while protecting additional races down the ticket. A presidential election year is thus scarce on time, ill-timed for angering influential interests, and better for party messaging than messy legislating.
The Current State of Tax Policy
All of the above concerns more general lawmaking trends. There are many tax policy trends that deserve more specific attention. To highlight just how far we’ve come from the last major reform in 1986, I thought I’d quote a Treasury Department news release from the time with Treasury Secretary Jim Baker reading a poem on “The Tax Reform Shuffle” on the occasion of TRA’s passage:
Rosty started hearings before the fall
They were Gucci to Gucci out in the hall
December came, reform was off track
So to the Hill rode the Gipper, to bring it back
The Conference met, and everybody asked
“Who can give the most to the middle class?”
Revenues got short, reform was in the red
So “shoot the estimator,” somebody said
Rosty and Bob finally agreed
Let’s take it from those who aren’t in any need
Today’s tax reform shuffle is similar in some ways: there are powerful, well-heeled interests at play, many see an important role for the President to help guide reform, and revenue estimates can be highly contested. And yet there are major differences today. We still generally talk about tax reform in the same conventional terms—namely, broadening the base (curtailing tax expenditures) and lowering the rates.
The possibilities for conventional tax reform (broaden the base, lower the rates) are far different today than in 1986. This is true both because major revenue numbers of different varieties have changed—namely, there were more opportunities for broadening the base in 1986 than there are today, and tax rates were higher then and thus easier to cut. There are also more modern challenges—particularly that international tax avoidance has become a lot more sophisticated.
There appears to be bipartisan consensus that the corporate rate could use reforming, and different international problems beg greater resolution. Both parties generally agree that the rates should be lower, the base should be broadened, and something should be done about international problems like inversions. Republicans want lower rates, and a move towards not taxing American multinationals’ overseas profits. Democrats are wary of lowering the rates too far and losing revenue without meaningful reforms to broaden the base and address international tax avoidance. Far more is needed before serious legislation can be attempted. On tax reform, the devil is in the details—and in the politics.