The emerging consensus on how to improve the tax code
Politicians may seem hopelessly divided over taxes, but a closer look reveals that Republicans and Democrats are starting to reach a consensus on how to improve our nation’s tax system. Both parties agree that the tax code is too complex, contains too many loopholes, and causes harmful distortions in the economy. Leaders on both sides are even starting to agree on how to solve these problems, with similar policies appearing in various tax reform proposals from across the political spectrum.
Politicians often talk a good game about closing tax loopholes, but they are less forthcoming about which specific tax breaks they would scale back. However, a new report by the Center for American Progress dives into the specific changes that are likely to be enacted when lawmakers turn to tax policy by looking for common factors in various tax reform efforts from across the political spectrum, including proposals from President Obama, Rep. Dave Camp (R-Mich.), and Sens. Ron Wyden (D-Ore.) and Dan Coats (R-Ind.), among others.
The report found more than 20 consensus policies that would collectively raise revenues by well over $1 trillion over 10 years. For example, conservatives and progressives have noted that while major tax breaks—such as the mortgage interest deduction—may serve a valuable public purpose, they also deliver the greatest benefit to wealthy Americans who are least in need of government subsidies. Tax reforms from both sides of the aisle have proposed limiting the upside-down nature of these tax breaks to focus their benefit more on the middle-class. This alone could raise revenues by approximately $500 billion over ten years.
To further explore areas of bipartisan consensus within tax policy, the Center for American Progress convened Jared Bernstein from the progressive Center on Budget and Policy Priorities and Douglas Holtz-Eakin from the conservative American Action Forum on Tuesday in a discussion moderated by Eric Toder of the Tax Policy Center. While each expressed different views on optimal tax policy—and sharply disagreed on the Obama administration’s actions against corporate inversions—both agreed that the tax code needs reform and found some specific policies on which they could agree.
During the discussion, Bernstein and Holtz-Eakin both spoke favorably about transitioning from a gas tax to a mileage-based user fee, limiting itemized deductions, and even introducing a carbon tax. However, Holtz-Eakin cautioned that “this is a tough environment” for tax reform, in part because the American people “think tax reform is a trick, and they don’t think they’re going walk away from it with everyone paying their fair share.”
And while progressives and conservatives may agree on several policies to raise additional tax revenue, they still remain divided on how to spend it. Progressives believe the revenues are best used to strengthen Social Security, Medicare, and Medicaid in order to meet the needs of an aging population, or to fund new investments in infrastructure and education. Conservatives tend to focus on lowering tax rates, particularly the top tax rates paid by wealthy individuals and corporations.
In light of the roadblocks facing comprehensive tax reform, as well as disagreement over how to use new tax revenues, one way forward for lawmakers in the short-term could be using consensus tax policies to help advance goals shared by Democrats and Republicans. For example, consensus tax policies could be part of a package to reinstate a set of expired tax breaks collectively known as the “tax extenders,” or to replace the damaging across-the-board cuts imposed by sequestration. Additionally, lawmakers could put together a package of consensus tax policies to pay for an expansion of the Earned Income Tax Credit. This tax credit lifted 6.5 million Americans out of poverty in 2012, but its benefit is minimal for childless workers. President Obama and Rep. Paul Ryan (R-Wis.) have endorsed nearly identical proposals to expand the EITC for childless workers. Earlier this year, Sen. Patty Murray (D-Wash.) introduced the 21st Century Worker Tax Cut Act, which uses consensus tax policies to pay for an EITC expansion.
In the long-term, no one can stop the population from aging, so lawmakers will have to choose whether to impose deep cuts in Social Security, Medicare, and Medicaid benefits, or accept the need to raise additional revenue. Bernstein confronted this choice at the Center for American Progress event by stating, “The suggestion that somehow revenue-neutrality is an acceptable goal of tax reform is one that I strongly reject.”
Republicans and Democrats have significant and sincere disagreements over taxes. In those cases where there is strong disagreement, it is understandable—if regrettable—that politicians are unable to compromise. But by starting with agreement on some basic tax principles—simplifying the tax code, broadening the base, and minimizing economic distortion, to name a few—we see consensus emerging around a set of good tax policies that just make sense. In at least some of these cases, even our gridlocked political system should be able to set aside partisan division and improve our nation’s tax system.
Stein is the associate director of Fiscal Policy at the Center for American Progress, a progressive public policy research and advocacy organization..