Wednesday, July 31, 2013

Tax Reform? Just "Get Rid Of The Deductions That Don't Affect Me"

Having your cake...
... while everyone else diets.
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From Ezra Klein's Wonkbook

"Get rid of the deductions that don't affect me." That’s what Debbie Schaeffer, the owner of Mrs. G TV and Appliances, told Max Baucus and Dave Camp, the chairmen of the Senate and House committees charged with tax reform, when they asked for her advice.

This is the core problem with tax reform, a policy that Washington loves and the country mostly doesn’t care about — at least until Washington begins talking about taking away the deductions they use, and then they hate it. Everyone wants a simpler tax code. But they want it simplified by cutting somebody’s else’s tax breaks. Nobody is mad about filling out an extra box when it means they get $500 back.

Listen to the tax reform conversation for very long and you’ll recognize it’s developed a vocabulary that’s exquisitely designed to obfuscate this reality.

Politicians love to talk about “revenue neutral” tax reform that “lowers rates.” That’s what the Obama administration wants on the corporate side (well, save for this part), and what Republicans want on both the corporate and individual sides. The “lowers rates” bit makes it sound like a tax cut. It isn’t.

What “revenue neutral” means, in it’s delightfully dull way, is that the tax code raises the same amount of money after reform as it did before. Those lower rates simply reflect fewer deductions. That means that on average, nobody gets a tax cut — for every winner, there is an equal and opposite loser. And the loser will scream a lot louder.

Then there’s “loopholes” and “tax breaks.” These are the key ingredients of tax reform. They’re the parts of the tax code everyone agrees need to be cut. After all, who wants a code filled with “loopholes” and “breaks”? Sounds terrible.

Of course, most Americans don’t consider the deduction they get for state and local taxes a “break.” Nor do corporations see the deductibility of interest as a “loophole.” When you look closer, these “loopholes” and “breaks” — at least the ones big enough to make a dent in the code — were often added in for good reason and, whether they’re still there for a good reason, remain the most popular parts of the tax code. It’s only by keeping them vague that politicians can even talk about tax reform.

Want to know how unpopular cutting these deductions is? In the Senate, Max Baucus is promising his colleagues that any written ideas they contribute to tax reform will be kept held at the National Archives until the end of 2064. In other words, the only way he thinks he can get his colleagues to weigh in is offer to keep what they said secret for 50 years.

Of course, at some point, tax reform has to stop being polite and start getting real. The language has to become descriptive. And that’s where the trouble always comes in.

To see why, Compare two sentences:

By the end of this year, we’re going to pass revenue neutral tax reform that gets rids of wasteful loopholes and deductions and lowers your rates!

And the translated version:

By the end of this year, we’re going to pass a tax-reform plan that doesn’t save Americans any money but cuts things like the state and local tax deduction and the home-mortgage interest deduction and the depreciation rules for businesses in order to lower some of your rates!

Doesn’t sound as good, does it?

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