Tax reform is dead. President Obama killed it, with an assist from Senate majority leader Harry Reid.
To be exact, it’s officially dead now for this year and next. But in truth, it’s been dead for months because Obama, in private negotiations with Republicans conducted by his aides, rejected the one thing that makes tax reform politically possible: revenue neutrality. It allows the tax base to be broadened and tax rates to be lowered.
But Obama doesn’t like this formula—that is, traditional tax reform. He wants reform that raises tax revenues. He would kill tax preferences and loopholes, then use the windfall this produces to fund his favorite spending programs.
The president has been publicly committed to revenue-neutral reform of corporate taxes for years. But his negotiators added a twist. Sure, the White House would happily go along with neutrality. But they insisted this was a concession on Obama’s part and would have to be matched by GOP concessions.
You can guess the concession they had in mind: higher taxes. For corporate reform to be neutral, Republicans would have to agree to raising revenue with higher taxes on individuals. For Republicans, that was (and is) a non-starter.
Last week, Obama abandoned the pretense of revenue neutrality. He proposed to cut the corporate rate to 28 percent from 35 percent through reform that would leave him with a bundle of money to spend. By definition, that’s not revenue neutrality. Also, he called for a permanent tax on profits that American companies keep in foreign countries to avoid corporate taxes here. Republicans, conservatives, and the business community said no to these concoctions.
A week earlier, Reid did to reform of the tax code covering personal income what Obama did to reform of the corporate tax system. He pronounced a death sentence. “It can’t be revenue neutral,” he said. “It can’t be even close to revenue neutral. There has to be significant new revenues.” He suggested a tax hike of $1 trillion, as called for in the budget endorsed by Senate Democrats.
Like Obama, Reid knew his demand for more tax revenue would be unacceptable to Republicans. There aren’t many things Republicans are unanimous about these days, but revenue-neutral tax reform is one of them. They regard the 1986 tax reform, in which the top rate on individuals dropped to 28 percent, as the holy grail of tax legislation.
The difference in 1986 was that leading Democrats—Sen. Bill Bradley and Rep. Dick Gephardt—were enthusiasts for tax reform. After his own tax bill failed, Rep. Dan Rostenkowski, the Democratic chairman of the House Ways and Means Committee, signed on. And the president, Ronald Reagan, had put tax reform on the agenda with his own proposal.
Obama has taken it off the table. What does he get out of doing this? An issue. He’ll insist he agreed to a bipartisan compromise to cut the corporate rate, only to have Republicans refuse to cooperate. All he wanted in return, Obama will say, was tax revenues to “invest” in roads, education, and job training and boost the economy. What’s not to like?
The answer is many things and one big thing. Obama operates under the illusion that government spending boosts the economy and produces a wave of new jobs. That’s why he wants more revenue. What he ignores is that the government spent at record levels in his first term and produced a lame recovery and a serious decline in the percentage of Americans in the workforce.
Yet instead of offering incentives to the private sector to invest in growth and jobs, Obama is sticking to his government-only bias. If he were a pragmatist, he’d see the error of his ways and change his economic policy. But he’s a liberal ideologue who has now killed a proven spur to the economy: tax reform that cuts rates without adding more taxes.
Since the last reform in 1986, “the global marketplace is moving much faster than a once-in-a-generation pace,” Douglas Holtz-Eakin, former director of the Congressional Budget Office, wrote in Politico. “The current rules were fine when U.S. exports dominated a global economy . . . but they are ill-suited for a digital age of intense competition.”
Despite Obama and Reid, Rep. Dave Camp, who chairs the Ways and Means Committee, intends to draft a tax reform bill this fall. He and Sen. Max Baucus, the chairman of the Senate Finance Committee, have been negotiating a compromise on tax reform for months.
But at best, Republicans will only get an issue of their own. Politico has reported that Camp wants to cut the top corporate and individual rates to 25 percent. That’s a far cry from what Obama and Reid want.