Why al­most ev­ery­one is wrong about tax re­form

Austin American-Statesman - - BALANCED VIEWS - From the right Mon­day Tues­day Wed­nes­day Thurs­day Ponnuru is a Bloomberg View colum­nist and a se­nior ed­i­tor at Na­tional Re­view; rpon­nuru@bloomberg.net. Fri­day Satur­day Sun­day

Al­most

ev­ery­one thinks we should broaden the tax base; that is, re­duce the num­ber and size of tax de­duc­tions, ex­clu­sions and cred­its.

The Bowles-Simp­son fis­cal-re­form plan went af­ter tax breaks so ag­gres­sively it was able to slash the deficit and still cut tax rates. Most con­ser­va­tive re­form­ers fol­low that model. Even econ­o­mists who aren’t con­ser­va­tives gen­er­ally say the government should raise rev­enue by get­ting rid of tax breaks be­fore it raises rates. That is the po­si­tion Repub­li­can lead­ers in the House and Se­nate have taken, too.

As pleas­ing as it is to find a con­sen­sus in this po­lar­ized era, this one is mis­taken. It would be ei­ther un­de­sir­able or po­lit­i­cally im­pos­si­ble to re­duce the largest loop­holes in the code.

At the top of the Con­gres­sional Bud­get Of­fice’s list of the big­gest tax breaks is the ex­clu­sion of em­ploy­er­pro­vided health in­surance from the in­come and pay­roll taxes. You pay taxes on your wages, but not on your ben­e­fits, en­cour­ag­ing em­ploy­ers to pro­vide more of your com­pen­sa­tion in the lat­ter form. The pol­icy is some­thing of a his­tor­i­cal ac­ci­dent: It arose af­ter em­ploy­ers used ben­e­fits to evade World War II-era wage con­trols. If we were de­sign­ing a code from scratch, we would cer­tainly tax th­ese ben­e­fits.

We have had this break for an aw­fully long time, though. It would be dis­rup­tive, as well as un­pop­u­lar, to get rid of it. The ex­clu­sion should be mod­i­fied so that it doesn’t re­ward peo­ple for choos­ing more ex­pen­sive poli­cies, and so that peo­ple who have no ac­cess to em­ployer plans can buy in­surance for them­selves. What we won’t do is get big sav­ings from shrink­ing this tax break, and we shouldn’t try.

Sev­eral other large breaks ben­e­fit sav­ings and in­vest­ment, the most fa­mous be­ing the low tax rate on cap­i­tal gains and div­i­dend in­come, com­pared with la­bor in­come. In a way, th­ese aren’t tax breaks at all: They are a par­tial cor­rec­tive to the code’s bias against sav­ing and in­vest­ment. A bet­ter code would just tax con­sump­tion, which would mean a smaller tax base.

Econ­o­mists gen­er­ally dis­like the mort­gage-in­ter­est de­duc­tion, an­other big one. They ar­gue that it has re­duced na­tional wealth with­out do­ing much to in­crease home own­er­ship. With hous­ing show­ing signs of a re­cov­ery, it seems an in­op­por­tune time to fight this de­duc­tion. Any­way, Real­tors in ev­ery con­gres­sional district in the coun­try, all of whom know a lot of peo­ple in their com­mu­ni­ties, would surely

Kath­leen Parker

David Brooks

Ross Douthat

Ramesh Ponnuru jam the phone lines on Capi­tol Hill if any­one tried it. It’s not hap­pen­ing.

Like the tax breaks for sav­ing, the tax credit for chil­dren can be jus­ti­fied as a par­tial cor­rec­tive to other fed­eral poli­cies. By rais­ing kids, most par­ents make a con­tri­bu­tion to the fu­ture of So­cial Se­cu­rity and Medi­care be­yond what they pay in pay­roll taxes. Fully rec­og­niz­ing that dou­ble con­tri­bu­tion would re­quire ex­pand­ing the credit, not shrink­ing it.

The de­duc­tion for char­i­ta­ble con­tri­bu­tions is an­other sacro­sanct tax break — and that’s fine. How many peo­ple really think the tax code has wreaked dam­age on Amer­i­can so­ci­ety by en­cour­ag­ing more char­i­ta­ble giv­ing than would oth­er­wise take place?

Round­ing out the list of the top breaks is the de­ductibil­ity of state and lo­cal taxes. It’s hard to see the jus­ti­fi­ca­tion for mak­ing peo­ple in low-tax ar­eas pay more to sub­si­dize states that choose to have larger gov­ern­ments — es­pe­cially when many high-tax states have higher in­comes than the low-tax ones, and when the big­gest ben­e­fi­cia­ries of the break are high earn­ers.

Even this break won’t be cur­tailed eas­ily, though. Politi­cians in high-tax ju­ris­dic­tions tend to be strong sup­port­ers of this de­duc­tion, and you can’t blame them: Their vot­ers would get hit hard if this de­duc­tion were scaled back, and it might force changes to their bud­gets as those vot­ers grew more sen­si­tive to state and lo­cal taxes. The Ron­ald Rea­gan ad­min­is­tra­tion tried to elim­i­nate this de­duc­tion in the 1986 tax re­form but failed be­cause of op­po­si­tion from high-tax ar­eas.

The more closely you look at the tax code, the less promis­ing the idea of broad­en­ing the base be­comes. That may be why Mitt Rom­ney’s cam­paign pro­posed im­pos­ing a cap on the to­tal value of all de­duc­tions any­one can take (and why so many con­gress­men are now talk­ing about the idea). It is more or less an ad­mis­sion that par­ing back the num­ber and size of spe­cific tax breaks is more po­lit­i­cal trou­ble than it is worth in rev­enue.

The Bowles-Simp­son model of tax re­form — broad­en­ing the base and low­er­ing rates — is the wrong one. Some tax breaks should be scaled back, to be sure. But the idea that the fed­eral government can pain­lessly raise a lot of money from a base-broad­en­ing tax re­form is a myth.

Amity Shlaes Charles Krautham­mer

Ge­orge Will

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