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The Bush tax cut Armageddon could yield a better tax code

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How much does the federal government actually spend? About $830 billion more than you think.

That’s the conclusion of a recent study by Donald Marron and Eric Toder. They analyzed so-called tax expenditures — the deductions, breaks and loopholes that clog the tax code — and sorted them into two groups: “spending substitutes” and “tax policy design…”

Other expenditures, however, are simply government spending programs by another name…

Marron and Toder counted about $600 billion of such expenditures in the 2010 tax code. Add in $230 billion in “user fees” that are counted as “negative spending” but are more like tax revenue, and you reach the $830 billion total — “almost 30 percent more than officially reported…”

But here’s the rub: Although the looming expiration of the Bush tax cuts adds urgency to reform, they also stand in its way…

The Bush tax cuts have created a “baseline” problem. The two parties can’t agree on a plan because they can’t agree on a common equation for how much revenue counts as “revenue neutral.”

Republicans work from a baseline that includes a full extension of the Bush tax cuts. The Democrats’ baseline assumes the expiration of the tax cuts for families earning more than $250,000. The Congressional Budget Office uses yet another baseline, one that assumes that all of the Bush tax cuts will expire, because that’s what current law says will happen at the end of 2012. The difference in revenue between the Republican and the current-law scenario exceeds $4 trillion over 10 years.

So before we can even discuss what a new tax code should look like, we somehow need to resolve the most polarizing question in American politics: Should taxes be higher or lower?

It’s extremely unlikely that the two parties will come to an agreement on their own. Luckily, they don’t have to. If they simply continue to disagree, at the end of this year the Bush tax cuts will expire, and two of the competing baselines will fade away, leaving only the CBO’s standing.

Some Republican staff members say, though they oppose this outcome, it would actually make tax reform easier by enabling both parties to sell reform as a huge tax cut that reverses the expiration of most of the Bush tax cuts.

Here’s why: Using the Republican baseline that assumes all of the Bush tax cuts are extended, President Barack Obama’s plan amounts to a $1.5 trillion tax increase. But using a baseline in which all of the Bush tax cuts have expired, a tax reform plan that hits the same revenue target as Obama’s amounts to a $2.5 trillion tax cut. Neat, huh?

That’s not just a PR point: Tax reform would, in that scenario, actually be a huge tax cut because, after expiration, taxes really would have reverted to a much higher level. Reality is always more compelling than baselines. The two parties would still have to settle on a final revenue number, but at least they could agree on one that would cut taxes on almost all Americans.

Which highlights another reason that letting the Bush tax cuts expire might lead to tax reform: Their sudden withdrawal would be so calamitous to the economy, and so embarrassing to Washington, that the crisis could force the two parties to fast track a reform plan, saving most taxpayers from feeling the bite of Washington’s failure.

It’s sad to think that the only way to save the tax code might be to let it collapse at the end of the year. But that doesn’t mean it isn’t true.

Ezra Klein presumes the embarrassment of our tax system collapsing will force Congressional Republicans into honest, principled negotiations with Congressional Democrats. If the current makeup of Congress is continued – with populist nutballs in place of competent conservatives – I don’t see a chance of avoiding the ongoing collapse of political processes inside the Beltway.

Unless a couple of things happen concurrently, I think what progress the US economy has made towards crawling back out of the Great Recession will be halted, perhaps crushed. Sending us back into recession. Voters need to stand up for reason instead of the populist folly – compounded by racist agitation and religious bigotry – that opened government up to epidemic failure these past couple of years.

Timorous Democrats can’t be expected to grow courage. But, increasing their numbers might add a modicum of reason. Eliminating corporate butt-kissers from both parties is always a useful step. Replacing Tea Party evangelistas with grownups in those seats – with sufficient education, principles and an understanding of history and economics that extends beyond George Wallace – probably could open the door to old-fashioned negotiated structures that remove tax loopholes from a strengthened tax code.

For a while at least.

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Written by Ed Campbell

April 21, 2012 at 10:00 pm

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