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Toward Tax Reform

08 Sep 2009
Posted by Bruce Bartlett

Back in March, President Obama asked Paul Volcker, chairman of his Economic Recovery Advisory Board, to appoint a task force on tax reform. Volcker appointed former Council of Economic Advisers chairs Martin Feldstein and Laura Tyson, former Federal Reserve Board Vice Chairman Roger Ferguson, and former SEC Chairman William Donaldson to the task force. Current CEA Member Austan Goolsbee was asked to assist the group. Here's the White House announcement:

http://www.whitehouse.gov/assets/blog/Fiscal_Responsibility_Summit_Report.pdf

Little is known about what the task force has been up to. It was asked to report back by December 4, presumably so that its recommendations could be included in the budget and State of the Union address.

In order to assist the tax reform task force, Tax Analysts, publishers of Tax Notes magazine, asked a variety of tax experts to offer some suggestions. Each person was given just 1,000 words to offer whatever advice they would give to the task force if they had five minutes of its time. Thirty-two experts responded and their advice has been collected in a new book that Tax Analysts has posted online for free here:

http://www.taxanalysts.com/www/freefiles.nsf/Files/TowardTaxReform.pdf/$file/TowardTaxReform.pdf

The contributions are a bit uneven. Some are just thin ideological screeds, others cover highly technical fine points. Of those I have had a chance to read, I would recommend the chapter by Eugene Steuerle. If there is an economist with broader or deeper knowledge of taxation I don't know who it is.

Gene quite rightly points to the Tax Reform Act of 1986 as a model to follow. The essence of its success, he believes, was that the Treasury Department controlled the process from beginning to end. A three-volume report was prepared by Treasury staff that was critical in shaping the basic idea of tax reform and how it should be structured. This report is available online here:

http://www.treas.gov/offices/tax-policy/library/tax-reform/

One of the benefits of such a study, which would have greatly assisted the health reform debate, is that it forces the staff managing the reform effort to think it through systematically. Thus before the tax reform proposal ever went to Congress in 1985, Treasury already knew all the potential problem areas, which provisions were expendable and which ones were not. Consequently, Treasury was able to manage the inevitable trade-offs necessary to get a bill enacted without sacrificing the basic goal.

I would just add from my own experience that the 1986 act was the culmination of a long-term process that began with a lot of discussion on Capitol Hill, at think tanks and elsewhere about ideas such as a flat rate consumption tax, a comprehensive income tax and other options. By the time the Reagan administration sent a formal proposal to Congress the basic idea of tax reform was clear in everyone's minds. Even so, it took a solid year of work to get a final bill.

This sort of process never occurred with health reform. There was never a study from the Department of Health and Human Services laying out the options, discussing the pros and cons of various alternatives, or with the sort of reference data that is essential for developing really big policy changes. In fact, there has never really been a formal White House proposal. This has made it easy for Congress to take control of the whole health reform debate, with Obama often appearing to be a mere bystander.

I think the administration would have been better served by having followed the Tax Reform of 1986 model. It would have taken a lot longer, but the chances of actually achieving something worth doing at the end of the day would have been much greater.

Tax Reform

Reagan had already won re-election by then, however, so he had less to lose. I do agree that more coordination is needed between tax reform and health care reform. I also know who's considering Tax Reform now, but I won't post it because I don't want the Fair Taxers to flood them with identical responses.


Tax reform/ health care reform/ Steuerle

All valid points about the comparision between the tax reform and health care reform processes.

Also relevant is the prior comment -- by 1986 the Reagan people had a lot of experience in office and had learned how to get things done.

Obama's people came in and from day one started remaking the world in all directions with no experience, as a team at least, at all.

As to Obama himself, be for him or against him, one must admit that his executive experience prior to this job was exactly zero -- upon taking over the most complex, challenging executive job in the world. And not modestly.

As to the thoughts on tax reform going forward...

Of those I have had a chance to read, I would recommend the chapter by Eugene Steuerle.

As ever.

If there is an economist with broader or deeper knowledge of taxation I don’t know who it is.

More than that, he's fair.

Even more than that, he's accessible.


Tax Reform

As a general matter, Bruce is right. The Executive Branch has more intellectual firepower on tap than Congress, and is less distracted by shiny baubles. It should generally take a proactive role in legislation.

I think that the Obama Administration knows this. But they also know what happened to health care in 1994, and don't want to repeat the experience. They think that a suboptimal bill is better than no bill at all, and think that an early lead role for the Administration will result in no bill.


Repeating the Clinton experience.

The Executive Branch has more intellectual firepower on tap than Congress, and is less distracted by shiny baubles. It should generally take a proactive role in legislation.

I think that the Obama Administration knows this. But they also know what happened to health care in 1994, and don't want to repeat the experience.

Yet they are repeating the experience.

They misread the Clinton experience as "Congress, unconsulted, blocked the plan -- so we'll kick the whole design of it over to Congress this time, and it will be on board, and pass it right through."

But the real Clinton problem was that after being elected with 43% of the vote the Clintons and Democratic Congressional leaders, after long frustration with Repub presidents, acted as if they had a huge mandate, overreached, and tried to rush through a huge program they couldn't explain to the public. So they lost the political center, and the rest became history.

So far Obama's done the same exact thing. He campaigned on the promise to bring in bipartisan, post-partisan government -- with health care reform negotiated openly on C-SPAN.

But in actuality he handed the whole thing over to Democratic Congressional leaders who, after long frustration with Repub presidents, have overreached and tried to rush through a massive reshaping of one-sixth of the entire economy that they can't explain to the public. This even while it is full of apparent contradictions ("dramatically change the system while letting everyone keep the coverage they have ... cut costs while increasing coverage and benefits ... slash Medicare spending, 40% if which is in the last two years of life, without cutting anyone's Medicare benefits, especially at the end of life".)

So they have lost the independents and political centrists who elected them, all polls show. Which has placed real fear of losing their seats -- just as in 1994 -- into congressional Democrats in centrist districts. And that's what's stalled health care reform.

At least the Clintons had a plan they could try to explain. Obama has what, three? five? 1000+ page plans so far, which means none. And as one of the top Dems in Congress, John Conyers, put it:

"What good is reading the bill if it's a thousand pages and you don't have two days and two lawyers to find out what it means after you read the bill?"

What kind of responsible Congressman would vote for any bill he or she can't understand? Much less one reshaping one sixth of the entire economy.

That's the big fundamental question independents and centrists are asking now (exploited by Repubs in many different ways). And that's the hurdle Obama has created for himself that he now has to jump.

And he should have to jump it.

Because if you propose to restructure one-sixth of the entire economy in short order, and fail because you can't explain what you are doing so the average independent voter can clearly understand and approve, you can try to blame your failure on special interests running Harry & Louise commercials or on right-wing loons ranting about death panels or on whatever other excuse you want -- but you deserved to fail and have nobody to blame but yourself.




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