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January 04, 2013 11:57 AM Revenue-Raising Tax Reform Still Probably Impossible

By Jonathan Bernstein

I’m inclined to agree with Ezra Klein’s post that liberals are failing to recognize that this week’s fiscal cliff deal was actually pretty good for them

However, it seems to depend on there being a good chance of revenue-raising tax reform. That still seems very unlikely.

I’ve written about this before, but here’s the problem, once again. Tax reform — eliminating or reducing favorable tax treatments in exchange for lower rates — is a nightmarish problem to solve under the best of circumstances. Revenue-neutral tax reform almost certainly creates marginal winners and solid losers, which means that tax reform legislation produces intense opposition and mild support. It’s hard to pass bills under those conditions! Under normal conditions, revenue-raising tax reform is even worse; it probably tips some marginal winners into marginal losers. But under current conditions, revenue-raising tax reform starts out by losing at least several dozen, and maybe over 100, House Republicans who simply won’t vote for anything that’s called “tax increase.” Even, as we saw yesterday, if you manage to get the votes to set it up as a “cliff” in which opposing it will just trigger some other tax increase.

And you’ll have to do that. There’s no way that you’re going to have any kind of comprehensive tax reform ready in two or three months. So that means a deal involving a fail-safe to “force” Congress to actually raise some target revenue amount. Which means for starters, you’re talking two revenue-raising votes — one for the fail-safe as part of getting past the debt limit, and another when the tax reform bill is finally ready. That’s already pretty tough.

But the real trouble is when you get to the tax reform bill. Because it will lose votes from Democrats who support higher revenues, and lose other votes from pragmatic Republicans willing to accept revenues in return for other priorities, you just aren’t going to have enough remaining votes. Or at least the chances of having enough votes are very, very small.

Now, maybe that just means that we’re stuck with the fail-safe, whatever that is, and assuming you can get the votes for that in the first place. Or maybe it means that (again assuming that the thing is passed in the first place) the revenue-raising tax reform bill fails, the fail-safe kicks in, and then the tax reform bill is redone as revenue-neutral from the higher baseline, and anti-taxers pretend to fall for it. But I just find it very hard to believe that the revenue-boosting tax reform bill gets anywhere. More likely, you wind up with Republicans insisting that lower rates pay for themselves, and Democrats sticking with neutral projections, and no way to bridge the difference. For liberals, it’s very easy to see a trap in which the two sides compromise on a halfway point between real revenues and imaginary ones, yielding a bill which actually winds up raising half the revenues they originally voted for (although it would be tough for even that to pass, since it still has the same problem as a larger revenue-raising bill).

The only way that revenue-raising tax reform could be at all useful would be if there are some Republicans who wouldn’t vote for plain-vanilla new revenues to get past the debt limit/sequester deadline, but would vote for revenue-raising tax reform backed up by vanilla-ish tax increases. I don’t think that group exists, but maybe it does.

But otherwise, I just don’t see how it’s going to happen. Raising taxes is hard enough, but doing it through tax reform makes it harder, not easier.

[Cross-posted at A plain blog about politics]

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Jonathan Bernstein is a political scientist who writes about American politics, especially the presidency, Congress, parties, and elections.
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Comments

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