Tax reform is tough
Ezra Klein's Wonkbook
On Thursday, Sens. John McCain, Rand Paul, and Rob Portman held a press conference to announce the "Jobs Through Growth Act." The core of the plan is a proposal for tax reform that would make the maximum individual rate and the maximum corporate rate 25 percent. The plan is to make this revenue neutral. And how does it achieve that? By asking the Senate Finance Committee to come up with a plan.
There's nothing new about that. The Simpson-Bowles Commission did the same thing. But the fact that no one will actually explain what they mean by tax reform goes to show how tough the politics of it truly are. In the press conference yesterday, McCain was asked for specific deductions that he would eliminate, and he proffered subsidies for sugar and ethanol. That's like trying to lose 100 pounds by cutting out the last bite of your fourth serving of cake. If you want a top marginal tax rate of 25 percent, you're hitting things like the mortgage-interest deduction. But few politicians are willing to broach that idea.
A better example of how tax reform looks when you get specific is Herman Cain's 9-9-9 plan. I say a "better example," rather than a "good example," because the plan is poorly crafted and vaguely explained. It is only slowly beginning to come clear, for instance, that Cain is proposing what amounts to a nine percent value-added tax on the business side and a nine percent sales tax on the consumer side for a total consumption tax of 18 percent.
Cain wanted his plan to be revenue neutral and, according to at least some tax experts, there's a pretty good chance he got there. But that's the problem with a revenue-neutral tax plan: it means you're simply changing who are the winners and who are the losers. Cain's plan raises taxes on the poor and middle class and cuts them on the rich. The McCain/Portman/Paul proposal doesn't have enough to detail to say who would and wouldn't be hurt. But in any of these plans, that ends up being the key question, as that decides the coalition that will arise to fight them.
Which is why I'm ultimately somewhat pessimistic about tax reform in the near future. What would have made me optimistic is if the Obama administration had chosen to use the expiration of the Bush tax cuts as an opportunity to reform the tax code. If it was clear that the Bush tax cuts would not be extended, and a failure to agree on a tax-reform proposal would mean a truly massive tax increase, then inaction would have led to more losers than action. The Bush tax cuts, rather than being a trigger that will lead to more tax cuts in a broken and inefficient system, could have been a trigger for fixing the system. But they have shown no interest in using them for that purpose, and nor have the Republicans.
Top Stories
1) House Republicans are working on big bills, report Jake Sherman and Anna Palmer: "House Republicans are doing an about-face, breathing life into expensive legislation long considered dead in Congress, showing that, yes, they do believe the federal government should be spending money on domestic programs. Speaker John Boehner is starting with the mother of all public works bills -- directing top aides to work with the Transportation and Infrastructure Committee on a six-year highway bill to rebuild the nation’s transportation infrastructure. The last such highway bill cost $286 billion -- House Republicans have not released cost projections for a new one. That same committee is also looking for a permanent funding fix for the Federal Aviation Administration, a bill that has been extended 22 times without a fresh rewrite. The four-year authorizing cost on this one could approach $60 billion."
2) DC has plenty of jobs plans, but no jobs policy, report David Fahrenthold and Rosalind Helderman: "There is a Senate Republican jobs plan and a House Republican jobs plan. There is a Democratic jobs plan and a progressive jobs plan. There is a new presidential jobs plan and an old presidential jobs plan, although both are equally dead. What Washington lacks is an actual jobs plan, with sufficient agreement from both parties to actually create jobs. Instead, the sides have underlined and re-underlined their contrasting sets of big ideas. That pulls them further and further away from real compromise -- since each side’s philosophy holds that the other’s is essentially bunk. For the GOP, the big idea is that government is the main problem. Republicans have proposed to stop new environmental and financial regulations, and lower corporate taxes. Then, the logic goes, a liberated private sector will pull itself off the mat."
3) The economy is so bad that it would be very tough for us to fall into another recession, reports Neil Irwin: "Consider housing, which is typically a major factor in recessions. At the peak of the last boom, Americans were spending $813 billion a year on residential investment. That figure bottomed out last year at only a $327 billion...Since hitting its low ebb, residential investment spending has rebounded only slightly, to a $336 billion annual rate this past spring. That means that, mathematically, it would be impossible for a new housing downturn to be as powerful an economic drain now as it was over the past several years; there isn’t $500 billion worth of housing activity left to vanish. Even if housing investment fell back to its low point from last year, that would subtract a trivial $9 billion in economic activity from overall growth. The same dynamic applies in other areas. Americans bought more than 16 million cars and light trucks in 2006, before the economic downturn. That fell to about 10 million in 2009. The 6 million fewer cars that were sold that year was another major factor in the economic contraction, costing hundreds of thousands of jobs at automakers and their suppliers. But auto sales have rebounded to only about 13 million a year, meaning that there is not as much room to fall if waning consumer confidence again leads Americans to become ultra-cautious."
4) Administration and Congressional officials are opposing deeper defense cuts, reports Thom Shanker: "Leading members of Congress joined the defense secretary and the new chairman of the Joint Chiefs of Staff on Thursday in arguing against any additional cuts in military spending as a special committee seeks to find more than a trillion dollars in new savings in the overall budget...Defense Secretary Leon E. Panetta has said the current budget cuts, while manageable, will be difficult to carry out. But he has warned of the 'catastrophic' effects if the special budget committee fails to find at least $1.2 trillion in additional spending cuts by late November. In case of such a stalemate, a system called sequestration kicks in, which would automatically slash an estimated additional $600 billion from the Pentagon...Their assessment was endorsed by senior House members, starting with Representative Howard P. McKeon, the California Republican who is chairman of the Armed Services Committee."
5) The administration is considering a plan to boost the mortgage market, reports Alan Zibel: "The Obama administration and a federal housing regulator are considering a program to draw private investment back into the government-dominated mortgage market by having Fannie Mae and Freddie Mac sell slices of securities that wouldn't carry a federal guarantee but would pay a higher interest rate than current mortgage-backed bonds. No decisions have been made, but officials believe a small pilot program could be rolled out sometime next year, according to people familiar with the matter. Officials see it as a step toward reducing the $10.4 trillion U.S. mortgage market's dependence on government-controlled mortgage companies Fannie Mae and Freddie Mac. The move would test the willingness of private investors to share the risk of funding home loans that are packaged by Fannie and Freddie. If the program were expanded significantly, it would likely raise mortgage rates over time because private investors would require greater returns than Fannie and Freddie currently do."
6) The 9-9-9 plan would raise an average family's tax bill by as much as $5,000. "I asked Edward Kleinbard, a tax law professor at the University of Southern California, to walk me through the tax burden for a typical family of four with an income of $50,000 in the current system and under Herman Cain’s plan. Before we get to the details, here’s the bottom line: Cain’s plan would increase the family’s tax bill by thousands of dollars."
Top Op-eds
1) China must respect the international free trade system, writes Mitt Romney: "Actually doing something about China’s cheating makes some people nervous. Not doing something makes me nervous. We are warned that we might precipitate a trade war. Really? China is selling us $273 billion per year more than America is selling China -- why would it possibly want a trade war? And what is the alternative to confronting China? It is allowing the Chinese to take by trade surrender what we fear to lose in trade war. Consider, too, that cheating is contagious. What China gets away with, other emerging economies may emulate. As these countries account for an ever larger share of the global economy, the consequences for the rule-following nations would grow even more intolerable. The result could be permanent damage to the international trading system."
2) Obama has worsened partisan polarization, writes Michael Gerson: "Certainly, the momentum of polarization was strong before Obama arrived in Washington...But far from halting or reversing these trends, Obama has worsened them -- setting the stage for the most polarized election of recent history. His failure has generally been not a matter of tone but of policy. The president’s early post-partisan rhetoric was never matched by innovative ideas that crossed ideological lines and created coalitions. Bill Clinton had welfare reform. George W. Bush had No Child Left Behind. Obama, in contrast, pursued a liberalism both bold and uncreative -- a massive Keynesian stimulus, a brand-new health entitlement, the largest deficits in American history. Congressional Republicans were obstructionists -- but often because Obama’s aggressive, ideological power play made obstructionism identical with Republicanism."
3) Republican presidential contenders don't have real jobs plans, writes Paul Krugman: "What do the Republicans want to do now? In particular, what do they want to do about unemployment? Well, they want to fire Ben Bernanke, the chairman of the Federal Reserve -- not for doing too little, which is a case one can make, but for doing too much. So they’re obviously not proposing any job-creation action via monetary policy. Incidentally, during Tuesday’s debate, Mitt Romney named Harvard’s N. Gregory Mankiw as one of his advisers. How many Republicans know that Mr. Mankiw at least used to advocate -- correctly, in my view -- deliberate inflation by the Fed to solve our economic woes? So, no monetary relief. What else? Well, the Cheshire Cat-like Rick Perry...claimed, implausibly, that he could create 1.2 million jobs in the energy sector. Mr. Romney, meanwhile, called for permanent tax cuts -- basically, let’s replay the Bush years!"
4) The tax pledge makes tax reform easier, not harder, writes Grover Norquist: "The pledge clearly and unambiguously endorses revenue-neutral tax reform and equally prohibits a net tax increase. This myth was again exposed when some tried to argue that the pledge stood in the way of eliminating the tax credit for corn ethanol...When did Congress actually reform the tax code by eliminating many deductions and credits for individual and corporate income tax and reduce marginal tax rates? That would be the Tax Reform Act of 1986, supported by Republicans and Democrats and signed into law by Reagan. Why was that effort successful when so many tax-reform projects stall? That year Reagan announced that he would veto any 'tax reform' that was a Trojan horse for higher taxes. When taxpayers and taxpayer-friendly lawmakers were freed of the fear that tax reform would be corrupted into a tax hike, the tax-reform effort succeeded."
Night light rock interlude: They Might Be Giants play "Birdhouse in Your Soul" live.
Got tips, additions, or comments? E-mail me.
Still to come: House Democrats have issued their supercommittee recommendations; a medical public service program is growing; "Occupy Wall Street" is exposing rifts in the left; a White House advisor with a financial stake in Solyndra pushed the administration to back it; and the world's bossiest flower girl.
Economy
House Democrats have issued their recommendations to the supercommittee, report Seung Min Kim and Matt Dobias: "Eager to shape the fiscal debate, House Democrats on Thursday offered the deficit-slashing supercommittee their own recommendations -- centered largely on increasing taxes and seeking more money for initiatives they say would ultimately spur job growth. Top Democratic leaders again prodded the special House-Senate panel to strike a bigger deficit-cutting plan than the $1.2 trillion minimum that it’s tasked to find -- saying their proposals, which mix cuts with revenue, would pave the path for a larger deal...The recommendations from Democrats on 16 of the standing House committees span dozens of pages and include a wide range of ideas, from legalizing young undocumented immigrants to forcing Treasury Secretary Timothy Geithner to fly commercial instead of using military planes -- a proposal that was later withdrawn."
"9-9-9" has deep Republican roots, reports John McKinnon: "Mr. Cain's plan clearly has roots in the Reagan-era antitax movement. In constructing the proposal, Mr. Lowrie consulted with conservative tax icon Arthur Laffer, often viewed as the father of supply-side economics. Many conservatives continue to espouse his view that lower tax rates and a wider tax base can accelerate investment and production, and even produce greater tax revenue in certain circumstances. Liberals say Mr. Laffer's ideas led to over-optimistic assumptions about how low tax rates could go. In fact, Messrs. Cain and Lowrie were on a trip to Nashville to get Mr. Laffer's blessing for their plan when it was given its name, according to Mr. Lowrie. He said that during their meeting, Mr. Laffer wrote an 'A' on the document and signed it as a souvenir. Mr. Laffer...said Mr. Cain's principles on taxation are 'really sound,' and that Mr. Cain himself is a 'world-class candidate,' but he also praised several other GOP candidates."
Adorable children in formal attire interlude: A flower girl wants wedding guests to just shut up.
Health Care
More doctors are nurses are participating in a health service program, reports N.C. Aizenman: "As a result of stimulus spending and increased funding through the 2010 health-care law, the number of clinicians participating in a federal program to expand access to care in under-served communities has nearly tripled in the past three years. About 10,000 doctors, nurses and other providers now participate in the National Health Service Corps, the highest number since the program was established in 1972, according to figures released by the Obama administration Thursday. Officials estimated that the corps is serving about 10.5 million patients. Since the 2009 fiscal year, the program has awarded medical professionals nearly $900 million in scholarships, loan repayments and other financial incentives in exchange for a commitment to provide two or more years of service in both rural and urban sites where clinicians are scarce. The new health-care law provided $290 million of that funding."
Medicaid's fate is with the Supreme Court, write Bruce and Stephen Vladeck: "When Medicaid was enacted, the possibility of private suits to enforce its provisions could be taken for granted. In the past decade, however, the Supreme Court has held federal statutes to an increasingly restrictive standard in deciding whether or not they may be privately enforced. The result has been clear: most of the lower courts facing the issue in recent years have held that the equal access provision can no longer be enforced in suits by beneficiaries or providers. But if beneficiaries or providers can’t enforce the equal access provision, who will? The answer, according to both California and the Obama administration, which filed an amicus brief in support of California in the Douglas case, is the United States Department of Health and Human Services. What they fail to acknowledge, however, is that the department utterly lacks the financial, legal, logistical and political wherewithal to enforce the provision."
Domestic Policy
"Occupy Wall Street" is revealing splits among liberals, reports Peter Wallsten: "The Occupy Wall Street protests spreading across the country are mobilizing liberal activists who have been largely sidelined in the national debate since helping to elect President Obama three years ago. This should be a relief to the White House, which is eager to excite a Democratic base that has grown disappointed in the president and less excited about reelecting him. But it is unclear whether this sudden burst of energy on the American left will help Obama and other Democrats. The protests are gaining steam around a set of economic grievances and a wariness of both parties’ reliance on corporate campaign money -- and Democratic officials are wondering how, or whether, they can tap into a movement that seems fed up with all brands of partisan politics."
Republicans are threatening labor rights, write Mark Barenberg, James Brudney and Karl Klare: "In the past month, the National Labor Relations Board has come under furious attack from Republicans in Congress, and decades-old workers’ rights are at risk. Backed by a well-financed lobbying and publicity offensive, Republicans are using a recent labor-law complaint against Boeing to achieve a radical goal that goes far beyond the legal issues in the case: unraveling workers’ rights that have been part of the fabric of our social contract since the Great Depression...Boeing has an opportunity at trial and in administrative and court appeals to disprove these allegations...But for Republicans, the legal process is beside the point. Representative Darrell Issa of California has disparaged the labor board as a 'rogue agency,' and the presidential candidate Mitt Romney has called the general counsel’s complaint a 'job killer' -- even though the outcome of the case will determine only the location, not the number, of jobs."
Supercut interlude: A compilation of songs featuring the line "that which does not kill me only makes me stronger."
Energy
A White House advisor with a financial stake in Solyndra pushed for it, report Carol Leonnig and Joe Stephens: "An investor in Solyndra who was also an Obama administration adviser pushed the White House in 2009 to support the solar panel maker. His push came as the company was seeking a half-billion-dollar Energy Department loan, documents show. David Prend, a co-founder of the Boston venture capital firm Rockport Capital, met with Obama’s then climate czar, Carol M. Browner, in late February to discuss clean-energy policies of the administration -- and Solyndra’s innovative solar panels were mentioned. He then e-mailed a White House aide to 'help get the word out' about the company’s pending partnership with the Obama administration. Prend’s Boston-based venture capital firm held 7.5 percent of the company’s equity."
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.
Oct. 14, 2011
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