2011 predictions: No tax reform in 2011 (or 2012)

2011 predictions from TaxVox are here: Substantial tax reform is still at least a year – and probably more – away.

Much as I hate to write these words, tax reform isn’t going to happen in the coming year, or even in the year after that.

The bipartisan tax deal reached by President Obama and Congress earlier this month, along with a few kind words about closing tax loopholes from a handful of GOP lawmakers, has some reformers uncharacteristically optimistic about a quick agreement to revise the revenue code. But, sadly, they are wrong. Here’s why there won’t be a serious effort to rewrite the tax code until after the next elections.

Obama isn’t on board. The President could have used the tax reform plans offered by his own fiscal commission or the Bipartisan Policy Center as an opportunity to jumpstart the debate. But he was decidedly cool, calling only for a national conversation on taxes. As Ronald Reagan showed with the 1986 Tax Reform Act, a major rewrite of the revenue code requires a full-court press by the White House. To get a bill moving, Obama would have to send a complete reform plan to Congress and keep up the pressure for passage. There is no sign he’s ready to do that.

Hill Republicans are not on board. Incoming Ways & Means Committee Chairman Dave Camp (R-MI) says tax reform will be one of his priorities, and that’s a good thing. But speaker-to-be John Boehner (R-OH) has little interest in supporting real reform. In the Senate, Democrat Ron Wyden (D-OR) still has his rewrite, but his GOP cosponsor, Judd Gregg, has retired and Republicans are not exactly lining up to take his place. Republicans would surely back further rate reductions, but they have no interest in cutting tax subsidies—the hard part of reform. It is easy enough for a pol to embrace the concept of repealing loopholes. It isn’t so easy to actually cut the mortgage interest deduction. And does anyone seriously think the GOP would give Obama an historic victory on tax reform on the eve of a presidential election campaign?

Hill Democrats are not on board either. After their battering in this year’s elections, Democrats want only one thing between now and November, 2012—a plummeting unemployment rate. And they don’t see how a nasty protracted debate over tax reform will create many jobs. Besides, these days Dems are just as enamored of targeted tax subsidies as Republicans.

There is no agreement on how much money the new tax code should raise. The ’86 Act passed, in part, because it produced the same amount of money as the tax code it replaced. But in the face of a $1 trillion-plus deficit and growing fiscal pressures down the road, the next reform would have to raise more revenues. Democrats, of course, will be fine with that. But the idea was red meat for Republicans even before the 2010 elections. The growing clout of the anti-tax activists who make up much of the tea party movement will make it even tougher for GOP lawmakers to budge on new revenues.

This year’s deal was tax deform, not reform. The compromise cut by Obama and Hill Republicans produced mostly winners (the only losers were workers making less than $20,000—and they rarely vote). It extended dozens of targeted tax subsidies and kept rates relatively low. By contrast, cutting rates while eliminating deductions and credits, and raising overall taxes would create boatloads of losers. This year, Congress nearly ran out the clock arguing over how to give away $850 billion. To be sure, they agreed in the end. But that’s no clue about how they’d react to a broad rewrite of the code.

Follow the money. We have learned a lot in recent weeks about who funded those non-profit outfits that plowed tens of millions of anonymous money into this year’s congressional campaigns. And much of the cash that found its way into the coffers of successful GOP candidates came from two sources: Wall Street and energy producers—among the biggest beneficiaries of special interest tax breaks. These folks paid good money to protect their subsidies. And I suspect they’ll get what they paid for.

Make no mistake, tax reform is going to happen, and relatively soon. But not in Obama's first term. I dearly hope I’m wrong, but I just don’t see it.

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