High-risk gamble of tax reform

The room is aglow in klieg lights as the chairman of the powerful Ways and Means Committee steps to the podium and announces a bold reform plan.  Every detail has been carefully reviewed and scored, reflecting years of hearings and preparation.  The thoughtful plan was put together with the tacit support of key constituencies. Within minutes, the party leadership signals that no action will take place on the plan.  Sound familiar? 

This is not the first time the irresistible force of a well-intentioned reform idea ran into the immovable object of political reality.  What the current Ways and Means Committee chairman, Rep. Dave Camp (R-Mich.), experienced is nearly a note for note replay of the roll out by another chairman of a similarly ambitious reform plan, but in that case, it was during the waning years of the Clinton administration and dealt with Social Security reform.  Even with the full support of the AARP, it enjoyed only a short political half-life as party leaders feared electoral repercussions, and an impaired White House was unable to lead.  Then, as now, while the reform math worked, the political will in Washington did not.

{mosads}Whatever you think of the Camp tax reform plan he is the Washington rarity of a politician who says what he means, and means what he says.  The plan on paper demonstrates the notion, at least according to the nonpartisan budget estimates, that it is technically possible to slash marginal tax rates dramatically, address complexity and inefficiencies in the tax code, and maintain its progressive fairness.  But with any reform of its size and scope, closer analysis will reveal important and negative consequences for important constituencies and sectors of the economy.  For every winner, there are vocal losers. 

That’s why putting out such a plan, especially now in the run up to the midterm elections, represents a high-risk gamble.  Perhaps the biggest risk is that it could open a Pandora’s box of revenue raising provisions for purposes other than what the authors intended.  

For supporters of revenue neutral tax reform, high marginal tax rates are the enemy of economic growth, and raising revenue by repealing the myriad preferences and distortions in the tax code is a necessary trade-off for the benefits of lowering tax rates.  However, for others, including the administration and many Democrats, tax reform was never about revenue neutrality, but rather a means to raise taxes to pay for new government spending and backstop an increasingly unsustainable entitlement system. 

As a result, the plan could easily find itself getting “Guarini-ed”—a term of art in the tax world attributed to a former Ways and Means member who had the uncanny ability to identify revenue raising provisions, only to have them snatched up by other members of the committee. 

In the big picture, the plan illustrates that major reforms have a gestation period and a lifecycle.  In historical terms, we are probably closer to the state of play in 1984, the year of the landmark Treasury I study, which provided an intellectual foundation for the reform process.  It was still a long time until 1986 came around.  Therefore, the Camp bill will more likely be akin to the Mack/Breaux or Simpson/Bowles commission plans, contributing to the longer-term debate, awaiting the time when the political climate for reform is ripe.   In political terms, timing is everything. 

When will that be? What’s been a missing predicate is a national political movement for the need to change our tax system in the first place, based on what’s at stake if we don’t.  In order for tax reform to become a political imperative on the national agenda, that still needs to happen.   The case will need to be made in a compelling way to ordinary Americans outside the beltway, and address the day-to-day issues they care about.  In a word, that is: jobs, jobs, and jobs.

In policy terms, the overriding problem confronting the country is how to advance our standard of living in the face of a dramatically downgraded potential growth rate for the economy.  To address that problem, policymakers will eventually be compelled to come to grips with ways to unlock the tremendous untapped growth potential of the American people.  There’s simply no way to meet our looming demographic challenges unless we do.  That means that like it or not, reforming the tax system will remain a key part of the policy discussion for years to come.

Smith served as chief of staff at the House Ways and Means Committee in 2000 and at the U.S. Treasury Department 2003-2006.