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Is tax reform possible?

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Politics,Beltway Confidential,Michael Barone

Mitt Romney has been criticized for not giving any specifics on his tax proposal, to cut tax rates and eliminate preferences—the same approach that was successful in the 1986 tax reform. My friends who write editorials for the Washington Post have particularly taken him to task, and their willingness to abjure liberal orthodoxy on occasion entitles them to be taken seriously. But I think the Republicans are taking a more serious approach than they suggest. Earlier this year I talked with House Ways and Means Chairman Dave Camp, who assured me that he has been working closely with Paul Ryan, whose budgets call for such tax reform but which like other budgets don’t set out specifics, and that he has been doing the research necessary to put a package together. Camp is currently undergoing chemotherapy treatments, but is expected to fully recover.

 

On the floor of the Republican National Convention I interviewed Utah Senator Orrin Hatch, who will be Chairman of the Senate Finance Committee if Republicans gain a majority in that body. Hatch said he works very closely with Camp and that he is prepared to put together a bipartisan package in the Senate, as he did on education bills when, much to everyone’s surprise, he became Chairman of the Health Education Labor and Pensions Committee after the 1980 election. It was only his fourth year in the Senate, and he managed to work together amicably with the ranking Democrat, Edward Kennedy. He says that Max Baucus, the current Chairman, who would be ranking minority member in a Republican-majority Senate, “is a very fine guy and we’ve gotten along.” He pointed out that Baucus pushed through the Free Trade Agreements with Colombia, Panama and South Korea despite considerable opposition from Democrats. I note that Baucus has been particularly willing to reach compromises with Republicans when he is up for reelection in Montana in years when his party is not in good odor there; this was very much the case in 2001-02 when he supported the Bush tax cuts. Hatch also said that he is “good friends” with Sander Levin, ranking minority member on House Ways and Means, and “I am hoping he will work with us.” Levin, whom I’ve known since 1964, is a stickler for details and has sometimes worked out arduous compromises on various issues.

 

Any compromise will have to involve limiting one or more of the three deductions which account for the largest dollar amount of tax preferences—home mortgage interest, state and local taxes, charitable contributions. As Paul Ryan points out, high earners get the bulk of these deductions, and he and the Republicans on the supercommittee have endorsed such proposals, pointing out that they raise more revenue from high earners without the disincentive effects of higher tax rates. Many Republicans and at least some Democrats may resist further limits on charitable deductions, and Democrats and perhaps Republicans from high-tax states will resist limits on the deductibility of state and local taxes (these are in effect subsidies to the public employee unions, which tend to rule the roost in high-tax states). But the case for the deductibility of very high mortgages is weak. Do we need to allow deductions for interest on a $1 million mortgage in order to encourage homebuying? Not really. And we should realize that our tax laws overincentivized homeowning. My conclusion: there is a way forward on tax reform, and the key Republican leaders have been working on finding it. It’s not an easy process—go back and read about the 1986 act—but it’s possible, with the right presidential leadership.

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