Tax reform: The cases for going long-term, versus going prudent

As a behind-the-scenes debate begins among reformers over just how to fix the US tax code, some Republicans insist that big, broad-based reform would be easier to accomplish, while others in Congress advocate for a more step-by-step process.

Make no mistake, any attempt at tax reform will be a heavy lift. But an interesting behind-the-scenes debate is brewing among reformers over just how high to aim. And some Republicans insist that big, broad-based reform would be easier to accomplish than a more modest rewrite of the Revenue Code.

The go-long theory, favored by House Ways & Means Committee Chairman Dave Camp (R-MI) and others, works like this: The way to break the logjam over reform is to propose an aggressive, attention-getting, block-buster rate cut. And you finance this ambitious goal by going after everybody’s tax preferences, not picking and choosing among the oxen to be gored.

Such a strategy serves two purposes, they say.  First, a big rate reduction—say, bringing the top corporate and individual rates down to 25 percent from today’s 35 percent—would generate the sort of popular enthusiasm that a more modest effort cannot. Who, the Camp camp asks, is going to get excited about knocking the top rates down from 35 percent to, say, 32 percent? It’s a yawner, they argue.

The second benefit to this strategy, supporters say, is that it forces all special interests to take a haircut on their existing tax preferences.  There will still be winners and losers, for sure, but because nobody would avoid losing some targeted tax breaks, it would be tougher for lobbyists to protect their clients. 

This model is much like the 1986 tax reform, which from its very beginnings was an attempt to knock individual rates down significantly (Ronald Reagan’s original reform would have cut the top rate, for example, from 50 percent to 35 percent). And it is similar to the strategy of the fiscal commission chaired by Erskine Bowles and Alan Simpson, which proposed taking the top rate down to 28 percent.

Of course, the go-prudent camp has different view:  It is naïve, at best, to think that a full rewrite of the Revenue Code is possible in the current political environment.  It would, they say, be something of a miracle if Congress can agree to any reform at all, much less mega-reform.

This view says take reform one step at a time. President Obama, for instance, has said that Congress should tackle corporate reform first. The more controversial individual provisions could be addressed later.

The cynics in the cautious camp have yet another argument. They say the go-long strategy is nothing more than justification for locking in big rate cuts that are both inappropriate and unsustainable in the current fiscal environment.

And, of course, there is perhaps the most likely option of all: Go home. As they have for decades now, policymakers will talk about tax reform even as they add more targeted tax breaks to the code. 

But let’s pretend Congress will enact some reform in 2013. What will it do? Today’s politics is so different from 1986 that I’m not sure how many lessons of that experience apply. And while I’d certainly like to believe that big, broad-based reform is doable, my head tells me it probably is not.

What do you think: Should tax reformers go long, or go prudent?