Former Sens. Connie Mack and John Breaux can’t win. The
presidential tax-reform commission they head hasn’t even released
its final report yet and many conservatives are already as unhappy
with its handiwork as they are with Harriet Miers.
By now, everyone knows that the existing tax code is hopelessly
complex, riddled with loopholes, and biased against productive
economic activities like saving and investment. The Mack-Breaux
panel’s task was to devise a simpler, fairer, less costly system
that would promote economic growth without costing the Treasury
money, all in a form that could conceivably become law.
The commissioners discovered this was a tall order. Consider one
problem they had to address. The alternative minimum tax (AMT) was
intended to keep rich people from taking advantage of so many tax
breaks that they paid little or no taxes. But it isn’t indexed to
inflation and is increasingly gobbling up middle-class families’
incomes. Left alone, the AMT may affect nearly 30 million taxpayers
by 2010.
So the Mack-Breaux panelists appear to be leaning toward AMT
repeal, a move that would simplify the code and offer tax relief.
But it wouldn’t be revenue-neutral: commissioners believe repeal
would cost $1.2 trillion in ten years. In order to compensate, they
are reportedly considering limiting the mortgage-interest
deduction to $300,000 or $350,000 of a mortgage instead of the $1
million limit under current law. Since even getting rid of the
mortgage-interest deduction entirely wouldn’t raise $1.2 trillion,
tax-free employer-subsidized health care and deductions for state
and local taxes may also be on the table.
Such a plan would not rally conservatives. Lawrence Hunter,
chief economist for the Free Enterprise Fund, complained to the
Washington Times that the “tax-reform panel is
recommending a huge tax cut for rich people in blue states and a
huge tax increase for middle-class folks in the red states.” Other
bolder plans have
gained a wider popular following than anything the president’s
commission is likely to propose — or that Congress is likely to
enact.
Tax simplification was supposed to be a winning issue. What
gives? The Mack-Breaux commission has fallen into the perennial
tax-reform trap: real and lasting reductions in the federal tax
burden are impossible until the federal government sheds its
substantial and growing spending commitments. As long as Washington
spends the vast sums the IRS sucks out of the private economy,
reformers can either make the code simpler while hitting some
Americans with higher taxes or incentivize investment with
consumption-tax schemes that mirror the complexity of the income
tax.
Since their emergence as the tax-cutting party in the 1980s,
Republicans have repeatedly tried to wriggle free from this trap.
Supply-siders led by Jack Kemp argued that the “root-canal
politics” of budget cuts were unnecessary because lower marginal
rates would enlarge the tax base sufficiently to fund the voters’
favorite government programs.
When marginal tax rates stretched all the way to 70 percent,
this position had some merit. The Reagan tax cuts touched off
extraordinary economic growth, which swelled federal revenues.
Deficits ballooned to 6.3 percent of GDP but subsided to 2.9
percent by 1989, even though the top rate had been slashed to 28
percent. There were budget cuts, but overall federal expenditures
rose even faster than revenues and most major programs remained
intact.
But it didn’t last. Rising payroll taxes, driven by retirement
spending commitments, ate into middle-class tax relief. As deficits
persisted, the top statutory marginal tax rate crept upward,
reaching 31 percent as a result of the 1990 budget deal and 39.6
percent in 1993. Tax rates never returned to their pre-Reagan
levels, to the lasting benefit of the economy, but they would
likely be lower today if Republicans had paid as much attention to
spending as to taxes.
Instead of emphasizing supply-side tax cuts that may eventually
increase receipts, conservatives are now more likely to call for
“starving the beast.” Under this theory, tax cuts can force
Congress to shrink government by reducing the available revenue.
The starve-the-beast argument has always had shortcomings.
Deliberately running deficits doesn’t seem fiscally responsible;
touting the revenue-losing effects of tax cuts reinforces liberal
claims based on dubious static projections.
The biggest problem with the argument, however, is that it
appears to be wrong. Taxes were cut in 2001 and 2003, but instead
of forcing budget cuts Congress and the Bush administration engaged
in a massive spending spree. Despite the deficit hawks’ best effort, the beast’s appetite is unabated.
Republicans are always looking for ways to limit the taxes
voters despise while protecting the programs they rather like. The
periodic assaults on the internal revenue code have become just
another attempt to square this circle. Yet no tax-reform commission
can change the basic fact that big government requires big
revenues.
To be sure, the worst excesses of the tax system can be
alleviated. The rate structure could be flatter and the number of
deductions reduced. We could delete provisions that distort markets
or inhibit growth. But as long as the federal government continues
to grow, more ambitious reformers will find themselves caught in
the same old trap.
