January 26, 2012
Tax reform: It’s one of the few areas in politics “where I think there’s at least the possibility of Republicans and Democrats working together to actually accomplish something,” said Bruce Bartlett, Fiscal Times columnist and author of a new book, The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take. “Everybody understands that something needs to be done.”
That may be wishful thinking, since Bartlett believes that President Obama “threw cold water” on any bipartisan effort in his State of the Union address by asking for several new tax preferences. Obama called for doubling “a special deduction available only to companies engaged in manufacturing, something that most tax specialists think should instead be abolished,” says Bartlett. All told, Obama’s proposals “do not move in the direction of tax reform.”
The leading GOP presidential candidates are no better. Bartlett says that Romney’s and Gingrich’s tax plans are non-starters. “To be blunt, they’re simply lying. If you’d like to say that they’re suffering from cognitive dissonance – fine. But they know perfectly well their proposals are complete nonsense. They won’t work.”
A widely published policy analyst (in addition to writing for The Fiscal Times, he is a contributor to The Financial Times, the Economix blog of The New York Times, and Tax Notes), Bartlett served in both the Reagan and George H. W. Bush administrations as well as on the staffs of congressmen Ron Paul and Jack Kemp and Senator Roger Jepsen. Bartlett expects continued robust debate on tax reform in the next year or two, although the trick will be how to get “from here to there, both politically and substantively.”
Excerpts from our conversation with the author:
‘Republicans Deny There Are Two Parts to the Deficit Equation’
The Fiscal Times (TFT): You believe that while government spending should be reduced, higher revenues are also necessary to stabilize our finances. Why should a goal of tax reform be “to make a higher tax burden more bearable”?
Bruce Bartlett (BB): Everybody complains about deficits and the debt. If they’re right that this is a problem, then they have to concede that at some point higher taxes are the lesser of evils. The problem is that Republicans simply deny that there are two parts to the deficit equation. You can either have higher spending or lower revenues – and basically our problem is both. But they just pretend that revenues have nothing to do with it, even though revenues right now are at a historical low of about 15 percent of GDP, versus a postwar average of 18 ½ percent of GDP. If we were at 18 ½ percent of GDP in revenues, we would be in much better shape – and that’s about where we would get to if we allowed the Bush tax cuts to expire, which nobody wants to do. So I think revenues need to be higher.
TFT: It’s the dead-weight cost of taxation, you say – the production, labor, investment that doesn’t occur because of the way our tax system is structured – that’s at issue. How would you change this?
BB: Taxes on investment and saving are high dead-weight costs, while taxes on property, real estate, wages and consumption tend to have low dead-weight costs. It’s why economists always talk about moving to a consumption-based tax system. It would let us raise the same revenue at a lower dead-weight cost. So it’s kind of a free lunch. If we’re going to have to raise the tax-GDP ratio, it’s all the more imperative to reform the tax system so as to reduce the dead-weight cost. You can afford to pay several percentage points of GDP in terms of lost output when the tax-GDP ratio is as low as it is right now. But if we raise our taxes up into the 20 percent of GDP range, then the dead-weight cost becomes much more painful, and we need to reduce it to prevent these higher taxes that I believe are necessary and inevitable from slowing economic growth.
‘Replace the Income Tax with a Value Added Tax’
TFT: Would you replace the personal income tax completely, or layer on a VAT as well?
BB: As a practical matter, we’d have to have both, but I’d consider replacing the income tax with a value added tax. The problem is that having no income tax at all would mean the wealthy would pay nothing, basically. And I’m sure that for Warren Buffett, the percentage of his income that goes to consumption is a tiny fraction, whereas for the average person it’s very high. So it would be a distributional nightmare. Since nearly half the people who file income tax returns pay no income tax at all, eliminating the income tax would also eliminate things like the earned income tax credit. So the almost 50 percent of the people who now pay nothing would pay a substantial amount of value added tax. That’s a real problem.
It makes a lot more sense to use the VAT as a supplemental revenue source to avoid raising tax rates in the future. I estimate we could get about $50 billion per percentage point of VAT. So a 20 percent rate, about what they have in Europe, would raise a trillion dollars a year of gross additional revenue. You could get rid of the alternative minimum tax and make the Bush tax cuts permanent. You could do all those things in a revenue-neutral manner if you had this additional revenue source.
‘GOP Proposals to Balance the Budget Are Complete Nonsense’
TFT: With GOP candidates like Mitt Romney and Newt Gingrich promising to balance the budget, wouldn’t the tax overhauls they’re proposing rob the Treasury of many billions in revenue – and knowing that, how can they vow to balance the budget?
BB: To be blunt, they’re simply lying. If you’d like to say that they’re suffering from cognitive dissonance – fine. But they know perfectly well their proposals are complete nonsense. They won’t work. They won’t be enacted. It’s purely a political signaling device. They’re just sending a message to the Republican electorate – which is obsessed with taxes – that they’re going to be super tough and aggressive on cutting taxes, especially for the rich, which for some reason Republicans are very attracted to. They’re just saying, ‘Mine’s bigger than yours,’ in that sense. None of this would come to pass even if a Republican was elected president, because for one thing they’d have to pass it through Congress.
Somebody like Mitt Romney, certainly, who’s adept at reading spreadsheets, knows this is just political pandering. There’s no possibility, no matter who’s elected, that the budget’s going to be balanced in even the next ten years. Even then, it would take an enormous amount of effort, and that’s only if we pass a tax increase and spending cuts that right now are impossible politically. But – we’ll see. Maybe I’m wrong.
‘I’ve Given Up Hope on the Politics of a Flat Tax’
TFT: Your thoughts on the flat tax?
BB: I would support a flat tax, theoretically. I’ve just given up hope on the politics of it. It’s utopia. We can strive for it but it won’t happen. The flat tax would get rid of all deductions. Just getting rid of the deduction for mortgage interest alone would be very difficult when you have 60 percent of Americans who are homeowners and who depend on that deduction. The deduction is capitalized into the value of homes. If you lose the deduction for mortgage interest, housing prices would fall, and how popular would that be? Then, getting rid of the exclusion for health insurance – that would greatly increase taxes on workers or businesses. It’s all just a pipe dream.
‘Norquist Has a Very Narrow Idea About Tax Increases’
TFT: In your book you say, “The success or failure of tax reform lies in the hands of Grover Norquist.”
BB: Speaking figuratively, that is. When politicians talk about tax reform, they’re really only talking about cutting tax rates. I’m not aware of anybody who has put out a list of tax revenues that would be increased to pay for the tax-rate reductions. So it’s all sugar and no medicine. For meaningful tax reform, we have to get rid of a lot of loopholes in the tax code. Not just little ones – big ones. We’d have to go after the mortgage interest deduction. Congress was willing to do that in 1986, and Reagan put in place a lot of tax increases. He raised the capital gains tax from 20 percent to 28 percent, for example. What Republican would support that today? The problem is Grover has a very narrow idea about tax increases: He’s opposed to all of them, under any circumstances. He says he’s in favor of revenue-neutral tax reform in principle, but any time anybody talks about getting rid of a loophole, he comes down on them like a ton of bricks. Look at the fight he’s been having for the past year with Tom Coburn over the ethanol subsidy.
TFT: So who’s going to buck him? Will anybody have the nerve?
BB: Maybe a Republican president, but I don’t see members of Congress willing to do so. They’ve seen what happens when they try to do bipartisan things. For example, former [Republican] Sen. Bob Bennett of Utah co-sponsored a health reform plan with [Democratic] Sen. Ron Wyden, and he was defeated in the primaries. That was a key reason. Certainly anything involving tax reform would have to have bipartisan support. It just seems that the hurdle is so high that it’s hard to see who would be willing to even dip their toe into the pool, let alone jump in. Maybe Grover would come up with his own tax reform plan – and support that. But he’s said publicly many times he believes there’s a division of labor in politics: Republicans only cut taxes, and Democrats raise them if they need to be raised. That is not conducive to enacting tax reform.
‘The Tea Party Takes Its Marching Orders from People Like Grover’
TFT: How does the Tea Party play into this?
BB: That phenomenon is independent of what Grover has done. But the Tea Party takes its marching orders from people like Grover. If he were to denounce some Republican, as he’s done with Tom Coburn, that person would have real trouble getting renominated by his party. Most Republicans are more fearful of losing the nomination than they are about losing the general election. We saw in the last election, in states like Delaware and Alaska, that the Tea Party doesn’t care if Republicans lose. They’re going to nominate people who will stand up and say, ‘We’re not going raise taxes, at any time, no matter what.’ These same people often will say, ‘If we have a debt problem, let’s repudiate that. Let’s just default on the debt.’ During the debt limit debate, many Republicans said they’d never vote to raise the debt limit, no matter what. This is the mentality we’re dealing with.
‘You Have to Hope That People Will Do What’s Right’
TFT: You say that the average American citizen should become as educated as possible about taxes and the tax system. How can citizens impact a fractured and politically fraught process?
BB: We do live in a democracy, and at some point you just have to hope that people will do what’s right. I tried to write a book that was ‘everything you wanted to know about tax policy but were afraid to ask,’ as opposed to a book about filing taxes. I emphasize the word policy here. People need to understand where provisions in the tax code come from. We may not get tax reform, but we’re going to debate it – and to follow that debate and understand it, this is a way to get up to speed.
‘Romney Knew He Was Going to Be Asked about His Tax Returns’
TFT: Romney has just released his 2010 tax return, plus a summary of his unfiled 2011 return. Your thoughts on this episode in the presidential campaign?
BB: The pressure on him to release many years of tax returns is now going to be relentless. I think he’s foolish for the way he’s handled this. In the last debate he acted like, ‘You’re asking me about my taxes? Gee, I haven’t thought about that.’ Of course he knew he was going to be asked about it. You would have thought he’d have had a much better answer than the one he gave. But it’s worth noting that he has never released his tax returns in any previous race that he’s run. He’s been very jealous in guarding his privacy.
TFT: Doesn’t this play right into the Democrats’ and Obama’s quest for the wealthy to pay more in taxes?
BB: Yes, it does. It’s just foolish. Basic PR strategy says if you’ve got something bad to get out, get it out – bury people in paper. Release 20 years of returns all at once. Make it hard for people to actually sort through all of it. And don’t release it electronically. He should have done this last year. Then it would be old news by now, you see. But the longer he keeps dragging it out – well, it’s getting to be like the Whitewater papers.
Michelle Hirsch of The Fiscal Times contributed to this article.