The definition of tax reform, in today's polarized politics, goes something like this:
Don't tax you, don't tax me,
Tax the other guy behind the tree.
Let's face it -- Republicans believe in tax reform if it means reducing taxes on the wealthy. Democrats believe in tax reform if it means increasing taxes on the wealthy.
And both parties believe in tax reform if it means cutting taxes on the middle class, even if that means endangering the solvency of Social Security -- exactly what Democrats and Republicans agreed to do, with the urging of President Obama, when they cut the payroll tax by 2 percent for 160 million Americans, which would slow the revenue stream into the Social Security trust fund.
"I never thought I would live to see the day when a Democratic president and a Democratic vice president would agree to put Social Security in this kind of jeopardy," liberal Iowa Sen. Tom Harkin said on the Senate floor. "Never did I imagine a Democratic president beginning the unraveling of Social Security."
So is real tax reform possible? Is this the one issue that can bring the hyper-partisan Congress together even while they seem unable to agree on a deficit-reduction plan -- even when they face $1.2 million in across-the-board cuts in defense and domestic programs?
It is possible if a 2012 tax reform effort follows the four basic principles that led to the last great bipartisan tax reform bill, the Tax Reform Act of 1986, enacted with leadership by President Reagan, every Republican's conservative hero, and a bipartisan coalition in a Republican Senate and a Democratic House.
The first principle is equity, which both conservatives and liberals can embrace -- i.e., equal incomes should pay equal taxes. The 1986 act reduced the top tax rate from 50 percent to 28, and increased capital gains from 20 percent to 28. That's right -- your eyes aren't seeing things. President Reagan and leading GOP conservatives supported increasing capital gains taxes and liberals in Congress supported reducing tax rates, producing equal taxes on both ordinary income and capital gains.
The second principle is private market efficiency -- i.e., the private market is a more efficient allocator of capital than Congress. That meant in 1986 President Reagan led Republican congressional conservatives to support eliminating $30 billion annually in loopholes, including such GOP sacred cows as oil and gas industry loopholes and large corporate tax breaks. But it also meant liberals accepting a reduction in the corporate tax rate.
And the third principle is revenue neutrality -- and, I would argue, the principle that creates the "purple" incentive of bipartisanship and compromise between left and right. As then New Jersey Democratic Sen. Bill Bradley, one of the key authors and sponsors of the 1986 Tax Reform Act, put it,
Once the discipline of revenue neutrality was adopted, the trade-off between loophole elimination [supported by Democratic liberals] and a lower top rate [supported by Republican conservatives] became obvious -- the lower the rate, the more loopholes had to be closed to pay for it and the deficit was not increased.
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Mr. Davis is the principal in the Washington D.C. law firm of Lanny J. Davis & Associates, which specializes in strategic legal crisis management. He served as President Clinton's Special Counsel in 1996-98 and as a member of President Bush's Privacy and Civil Liberties Oversight Board in 2006-07. He is the author of the forthcoming book to be published by Simon & Schuster, "Crisis Tales -- Five Rules for Handling Scandals in Business, Politics and Life." He can be found on Facebook and Twitter (@LannyDavis).
Follow Lanny Davis on Twitter: www.twitter.com/@lannydavis
Dean Baker: Santa Claus, the Tooth Fairy and the Bowles-Simpson Commission Report
And as Paul Abrams points out below, "revenue neutral" tax reform won't reduce the deficit or pay for programs which help the middle class and poor. Taxes as a percentage of GDP in the US are among the lowest in the capitalist world. We need a higher percentage of taxes to GDP, coming from the wealthiest Americans who have seen their taxes cut in recent decades, but that won't happen when lobbyists like Davis get through with "reforming" the tax code.
..."And both parties believe in tax reform if it means cutting taxes on the middle class"
..Excuse me...what voting process were you watching...????
...the gop was scratching. and clawin; and cryin the whole time over the payroll tax....
...so this payroll cut endangers soc.sec...?
there is no possible real separtate fund and payroll taxes aren't considered
an income tax by the gop , i.e. its not a ..."real" ...tax....
like a voluntary contribution from the liberal poor or something,,,,,
and the Bowles-Simpson Deficit Commission recommendations....?
They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.
charts showing deficits falling and debt levels stabilizing....???
how is this to be achieved? By “establishing a process to regularly evaluate cost growth” and taking “additional steps as needed.” What does that mean? I have no idea.
----paul krugman
obama offered real reform with spending cuts with minor a tax increase to bohner
and got seriouly slapped yet again...
...so here you are pretending that didn't happen....
so keep pretending the GOP red-state theocracy is still sane....
and good luck with that.....
Consider a wealth tax (Warren Buffett will), a sales tax (Bill O’Reilly will) and eliminate tax expenditures (Simpson and Bowles will). Put the three tax ideas together and you have the 2-4-8 Tax Blend which taxes individual and foreign-owned net wealth at 2% (above a $15,000 exemption), retail sales (or VAT) at 4% and income at 8%. The low rates yield $2.6 trillion – ($400 billion more than FY 2010 federal revenue).
• Rich and poor would pay the same “2-4-8” rates - making it the fairest tax system on the planet.
• Social Security and Medicare payroll taxes are eliminated - guaranteeing future unrestricted benefits paid out of the general fund for all.
• Earners keep about 20% to 30% more income each year – creating economic mobility and consumer power.
• Taxes on capital gains, estate transfers and gifts would not be necessary - restoring economic freedom to the investment class.
• Reduce the corporate income tax to 8% for all types of business - enhancing international competition.
We must stop blaming Social Security and Medicare for spending problems caused by a grossly unfair tax code. Only a tax blend that includes wealth, sales and income can create very low tax rates and maximize economic mobility. As Herman Cane might say - be bold.
Eugene Patrick Devany, JD, MPA
www.TaxNetWealth.com
The first thing we need to realize is that we need to increase the total amount of revenue we pay in taxes as a percent of GDP. Then, we need to figure out a fair way to raise it. And, we have to do this in the context of understanding: a) our elderly population is growing; b) we need to invest massively in the economy if we are going to get back to sustained growth; and c) cutting spending now will tank the economy. It can all be done, but the Davis's of the world are going to have to step up to paying a higher percentage of their income in taxes.