Tax reform dead on arrival, killed by Dems, GOP

Democrats and Republicans have again shown their unusual capacity to get nothing done in Washington.

Both parties recognize the federal tax code is a mess, riddled with so many deals for a wide variety of special interests that it is no longer fair in the way it treats most Americans. 

The last time there was full-scale tax reform was in 1986, when Ronald Reagan, a Republican president, negotiated an agreement with Sen. Daniel P. Moynihan, a New York Democrat.  It cut rates and eliminated loopholes.

But loopholes seem to regenerate almost by themselves.  Now the code is again riddled with special breaks and is hopelessly complex.

Rep. Dave Camp, a Michigan Republican and chair of the House Ways and Means Committee, has waded into the mess and come up with a proposal for tax reform.  It’s a serious plan that does much the same as was done by Reagan and Moynihan.

The reaction of the parties?  The Democrats rejected it instantaneously, because it does not raise taxes on the rich.  The New York Times, friendly editorially to the Democrats, echoed their view, finding it “a huge missed opportunity.”

On the other side, GOP House Speaker John Boehner’s reaction, when asked to comment on the proposal, was devastatingly simple: “Blah, blah, blah, blah.”  To him, it was not worth commenting on a plan that was dead on arrival.

What Camp offered was a comprehensive and thoughtful attempt to eliminate tax breaks, many benefiting big business and the wealthy, and using the proceeds to reduce rates for all.  The proposal was intended to be “revenue neutral,” meaning that it would raise the same amount of money as the current tax code.

That’s the essence of tax reform.  It fixes a broken code without at the same time either raising or cutting tax revenues.  The object is increase fairness.  Tax increases or decreases are completely separate matters.

A tax loophole allows somebody to avoid paying some taxes, leaving it to others to pick up the shortfall.  To lower rates for most people who do not use many of the loopholes, they have to be closed for others. 

A good illustration was provided recently by the Maine Center for Public Interest Reporting, which found TIFs – tax increment financing – amount to a tax break for some towns at the expense of others.  Yes, loopholes exist in Maine law, too.

Tax breaks find their way into the federal tax code thanks to the pressure of those who expect to benefit from them and politicians who favor them, often in anticipation of some of that money flowing back as campaign contributions.

Those who benefit from the breaks defend them by claiming they are essential to the well-being of the country.  They want more of them, not fewer.

What both sides miss, probably intentionally, is the Camp proposal is serious and likely to produce its promised result, making it a good starting point for negotiating a compromise version of tax reform.  Camp has not said it is a take-it-or-leave-it proposal.

But this is a Congress that does not negotiate or compromise.  Camp, in his last year as head of the powerful House tax-writing committee, has tried to get something going, but it looks like he has failed.

Take one example.  He proposes interest on mortgage debt should only be deductible for loans up to $500,000.  That covers most people, but New York City mortgages are often for much more.  Does that mean the plan should be killed?

If it makes sense to vary the allowance for mortgage interest, the amount could be set for each county.  That’s not difficult to do.  But the discussion will never get that far.

The reasons are simple.  Members of Congress find it less politically risky to leave the tax breaks alone rather than getting rid of them, even though, in some cases, those benefiting from the breaks would do even better with reform.

Reforming the tax code makes those using loopholes nervous.  So they make some more campaign contributions to Democrats and Republicans, who helpfully kill reform proposals. 

Members of Congress have become more responsive to the special interests supporting them than they are to average people, who are almost completely unrepresented in tax policy discussions.

Democrats want to see government play a bigger role in the economy and want tax increases to pay for it.  Republicans want to cut taxes and government’s role, leaving the economy to the private sector.  

Both oppose real, “revenue neutral” tax reform, because it does neither – just makes life more fair.