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David Brooks took some heat from conservatives for his Tuesday column suggesting Republicans accept tax rate increases for even larger spending cuts as part of the debt deal.
Disagreements of this sort among conservatives often stem from not defining up front what the purpose of taxes and tax reform should be.
While the official purpose of taxes may be to raise revenue for government’s operations, in today’s economic environment, growing the economy and shrinking the deficit should be the twin focus of tax reform. Not “increasing revenues” (as if revenues to fund poorly performing public programs are an a priori objective of natural law, as most Democrats seem to believe). Not lower rates for their own sake with little regards for all the “junk” in the tax code, a view held by many Republicans. Not political favoritism, as members of both parties believe if experience matters for anything.
If Brooks’ premise is right (that Democrats are asking not for an increase in tax rates, but merely an increase in revenues through closing loopholes and the like), then he’s right that it’s a pretty good deal if we care about growth. Presumably this is why Tyler Cowen says “take the deal.”
Tim Carney thinks the premise is wrong, though. Democrats want to increase rates, not just increase revenues by closing loopholes. Ed Morrissey basically seconds this view.
What’s really at issue here?
The real issue is whether it’s worth getting part of the way to a pro-growth tax system as part of the debt deal. What are the main components of such a system? There are three big ones:
First, debt reduction. Tax reform should aid in shrinking deficit spending over time, so that net debt each year is going down or at least staying even, but not going up. Without reversing the trend, markets will stay sluggish.
Second, lower tax rates that are broadly distributed. This is pretty much consistent with both the President’s deficit commission and the Paul Ryan budget.
Third, a tax code made much simpler. Ending all of the loopholes and exemptions is key to predictability and stability in the tax code.
Let’s stick with the individual tax code for now. But we could add a few other key components such as lower corporate rates. These are all components broadly accepted by members of Obama's deficit commission and Republicans in general.
If we were to achieve all of these at once, then:
Taxes would rise for lower and middle income families. With 47% of Americans not paying income tax, the only conclusion from fundamental tax reform is that working families will feel their taxes go up. Steve Hayward recently defended this kind of tax hike.
Removing the myriad exemptions, deductions, and credits would increase taxes on all who enjoy them. But this would ideally be off-set by the reduction in tax rates, so that the taxes paid remain constant. Of course, with something close to 15,000 amendments to the tax code in the past 25 years, it will be impossible for there to be a one-to-one offset for all taxpayers. Some will simply see a net increase, others a decrease.
So, this brings us back to the main sticking point: can we get part of the way there? Assuming we’re not going to raise taxes on low and middle income people right now by broadening the tax base, and assuming a reduction in tax rates is off the table until Republicans control both ends of Pennsylvania Avenue, is it worth going after a good bit of junk in the tax code?
Let’s say Democrats agree to keep tax rates where they are (the Brooks premise). What then?
Republicans should take the deal, as Brooks urges, with one qualification: let’s start with removing the tax breaks that are not broadly aimed at the population as a whole.
Keep the home mortgage deduction for now (though it should be eliminated or shrunk later). Keep the child credit. Keep all those credits that any American can qualify for.
But agree to let taxes rise for those people who got a special loophole written into the code that you and I don't enjoy. Use the ethanol vote as the model. Why should ethanol blenders get a break when you and I don’t? Republicans will have to follow the Coburn example and be willing to break this part of their taxpayer pledge (namely, that they would off-set every loophole elimination with a tax deduction), but the time for doing so has come.
Republicans can beat Obama at his silly corporate jet game by going after the unfair breaks in the tax code that benefit larger interests at the expense of other taxpayers. This is a basic fairness tenet of conservatism that conservatives have been far too willing to ignore for far too long.
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