Baucus, Hatch plan zero-based approach to tax reform

posted at 12:01 pm on July 2, 2013 by Ed Morrissey

Thanks to the IRS scandals, the political ground should be fertile indeed for tax reform.  Two senior members of the Senate have announced a bipartisan effort to overhaul the income tax in this session.  Orrin Hatch, who just won his sixth and probably final term, and Max Baucus, who announced his retirement at the end of his present term, will take a relatively novel approach to crafting a reformed tax code.  Rather than look for deductions, credits, and exemptions to eliminate, they will start with zero and require fresh justification for any proposed additions:

Lost amid last week’s tumult over Edward Snowden and the Supreme Court was a glimmer of hope for tax reform. The Senate’s two main tax writers, Democrat Max Baucus and Republican Orrin Hatch, announced the principle that they are going to rewrite the tax code from scratch and that the supporters of every tax preference will have to justify its continuation.

This is the right principle, both as tax policy and reform politics. The goal of tax policy should be to meet the revenue needs of the government with the lowest rate possible and the fewest economic distortions. Starting with a blank slate helps to show how low the rate can be with a tax code unencrusted by the barnacles of the Beltway.

As a political matter, the tabula rasa principle plays no favorites and forces the Senators on the Finance Committee to judge one tax preference against another and decide which ones matter the most.

That’s true as far as it goes, but it’s not going to solve the problems in the tax system in the long term.  The real problem isn’t the morass of exceptions built into the tax code; those are the symptoms.  The real problem is the ability of Washington to use the tax code primarily for social engineering rather than straightforward revenue collection.  Reform that leaves that power intact isn’t reform as much as it is a simple reset, a lesson we can learn from history, as I argue in my column for The Week:

If we fixed the problem in 1986, why do we need systemic reform again now? Congress and the Reagan administration made the mistake in 1986 of leaving the income-tax structure in place — and keeping the power to manipulate it on behalf of treasured constituencies. It didn’t take Washington long to start pushing the tax code back toward complexity and capriciousness; in 1990, just four years later, Congress pushed Reagan’s successor, George H. W. Bush, into an increase in tax rates that soured his relationship with conservatives, and we have hardly looked back since.

Now, the tax code — for both individuals and for businesses — has a tremendous amount of value for policymakers, and not just for their own electoral interests. Members of both parties push for tax breaks and tax penalties to incentivize or disincentivize a wide variety of behaviors, whether it’s to get investment in green energy, increase savings, or buy a new car — remember the $7,500 credit for buying an electric vehicle demanded by President Obama? The Low Income Housing Tax Credit provides a strong incentive to invest in lower-cost multi-family housing, while the mortgage tax deduction benefits millions by lowering their tax burden by having the rest of the taxpayers cover the interest costs of most mortgages. Thanks to the principles of federalism built into our constitutional republic, this is the only way in which members of Congress and presidents can dictate or incentivize our behavior.

Most of these credits, deductions, and exemptions are very popular. The power to create them is very popular on Capitol Hill and the White House, and in both political parties in the Beltway. As long as that power exists — as it will in the current income-tax system, regardless of how pared down it may get once a generation — politicians will use it. That means a reformed tax system won’t stay that way for very long, even when politicians have the best of intentions. Or perhaps it’s better say especially when they have the best of intentions.

Real reform would be to get rid of the current income-tax structure altogether, in a manner that ensured Congress couldn’t restore it, either by leaps or by increments. That would take a constitutional amendment to require a flat tax with no deductions, credits, or exemptions, or to eliminate the income tax altogether with a repeal of the 16th Amendment and create a consumption tax instead. The latter would eliminate the IRS and its abuses, while the former would render it incapable of real malice and bias. If we want to see truly innovative and courageous reform with the goal of eliminating abuses of power, those are the only real paths that guarantee results that endure.

The effort from Hatch and Baucus is well-intentioned, but doomed to failure.  Future Congresses will lard up the tax code almost as soon as it’s simplified by this process because it’s the best tool they have to interfere in the lives of citizens.  Unless we take that tool away, this will be another historical footnote.

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The real problem is the ability of Washington to use the tax code primarily for social engineering rather than straightforward revenue collection.

OR

THE REAL PROBLEM IS THE TAX CODE ….. IS THE TRUE POWER FOR THE POLITICAL THUGS

http://www.youtube.com/watch?v=0Wi8Fv0AJA4

ROFLMMFAO

donabernathy on July 2, 2013 at 12:11 PM

Hatch is just yammering some boilerplate.

But changing the law to permit American companies to hire foreign programmers at the expense of Americans workers in a tight job market: now Hatch will fight to the death for that.

kunegetikos on July 2, 2013 at 12:14 PM

The tax code will NEVER be reformed just like immigration will never be reformed. Unless, of course, the electorate wakes up and grows up, and throws everyone out of Congress and replaces them with leaders who understand the Constitution. Nothing but a pipe dream.

HiJack on July 2, 2013 at 12:16 PM

If you want real tax reform then the very first thing to do is get rid of this.

Oldnuke on July 2, 2013 at 12:21 PM

The tax code will NEVER be reformed just like immigration will never be reformed. Unless, of course, the electorate wakes up and grows up, and throws everyone out of Congress and replaces them with leaders who understand the Constitution. Nothing but a pipe dream.

HiJack on July 2, 2013 at 12:16 PM

I disagree with one thing you said. We need to replace them with representatives who will adhere to and follow the constitution. Most of them understand it just refuse to follow it. Some like Sheila Jackson Lee are too stupid to understand it but then they’re too stupid to breath without coaching anyway.

Oldnuke on July 2, 2013 at 12:24 PM

Hatch is one of the big hacks of DC. For shame the people of UT let him dwell there, same as McCain. How embarrassing.

Schadenfreude on July 2, 2013 at 12:28 PM

start with ZERO subsidies and watch ‘em wail.

hillsoftx on July 2, 2013 at 12:29 PM

The effort from Hatch and Baucus is well-intentioned, but doomed to failure. Future Congresses will lard up the tax code almost as soon as it’s simplified by this process because it’s the best tool they have to interfere in the lives of citizens. Unless we take that tool away, this will be another historical footnote.

I agree, but we have to start somewhere. There’s no massive interest in repealing the 16th. The average Joe doesn’t even know what that means. It’s not like repealing Prohibition. Everyone understood that.

We have to totally throw away our existing tax system if we’re going to be competitive in the 21st century. I can spend an hour justifying this with mathematics, and write several pages of text that no one will read, but you can take my word for it. Without it, the U.S. is doomed as a world power.

I applaud Baucus and Hatch for realizing that and trying to turn the ship around. Yes, they’re trying to use a soup spoon as a rudder, but it’s all they have at the moment.

Chris of Rights on July 2, 2013 at 12:30 PM

Second look at poll taxes?

Seriously, a head tax is the only way to eliminate the concept of some activities being more equal than others and a government distortion of the economy. It also comes with a nice side benefit – necessarily-shrunken government.

Steve Eggleston on July 2, 2013 at 12:35 PM

Hatch in that picture looks like he wants to bite Baucus on the neck. Necro senate love at first bite?

Regarding resets and starting at zero, what was the reason for 16th again? Oh yeah, just a tax on the very very rich. Who then stopped donating to charities, colleges etc. and thus enter special interest deductions. Sell the repeal of the 16th on that platform Chris. Its the ultimate reset, back to how the Fed gov was mostly funded till 1913.

oryguncon on July 2, 2013 at 12:37 PM

Hatch is one of the big hacks of DC. For shame the people of UT let him dwell there, same as McCain. How embarrassing.

Schadenfreude on July 2, 2013 at 12:28 PM

Alas, they always outshine their opponents and put on the conservative act around voting time. People’s memories and perceived shortcomings of opponents seem to work in their favor.

hawkeye54 on July 2, 2013 at 12:38 PM

Here’s some ideas of tax preferences to eliminate:

State and local taxes deduction (Allows progressives to use red states to subsidize their “fair share” to the Federal government while the blue states spend more at the local level. This only redistributes wealth from low-tax states to high-tax states (where government benefits are more abundant).)

Home equity indebtedness interest deduction (Note: this is not the same thing as home mortgage indebtedness. These types of loans should be treated no differently than unsecured loans.)

Mortgage interest deduction for second homes (Second homes are luxuries that don’t need to be treated any differently than a new car or watch.)

blammm on July 2, 2013 at 12:43 PM

the mortgage tax deduction benefits millions by lowering their tax burden by having the rest of the taxpayers cover the interest costs of most mortgages.

Well, maybe if we’d stop LYING about how deductions work, that would be a nice place to start. The mortgage tax deduction doesn’t require a single penny from anyone to help me pay the interest on my mortgage. It just means that the income I earned that I use to pay that interest should be tax free.

I still pay every penny of that interest myself.

deadrody on July 2, 2013 at 12:48 PM

Abolish the IRS. It can’t be saved.

John the Libertarian on July 2, 2013 at 12:52 PM

he goal of tax policy should be to meet the revenue needs of the government with the lowest rate possible

And the ACTUAL starting point should be in establishing what the “revenue needs of the government” really are. I don’t have any interest whatsoever in “tax reform” that alleges to meet the insane gov’t spending we are at right now.

Half that much ? Maybe. My taxes are already too high. In about the top 5% for household income, I’m not interested in any tax reform that doesn’t LOWER my taxes.

deadrody on July 2, 2013 at 12:53 PM

Work harder taxpayers. The witch needs more taxes…to be freed from prison.

Schadenfreude on July 2, 2013 at 1:01 PM

Abolish the IRS. It can’t be saved.

John the Libertarian on July 2, 2013 at 12:52 PM

Can’t be saved, nor should it be saved. Mired in politics and corruption.

hawkeye54 on July 2, 2013 at 1:01 PM

How about we start with a zero based BUDGET first, THEN figure out how much of a tax rate will provide just enough revenue for it?

And while we’re at it, just eliminate the income tax and go to a national sales tax (NOT a VAT) – and eliminate the IRS at the same time.

dentarthurdent on July 2, 2013 at 1:09 PM

That means a reformed tax system won’t stay that way for very long, even when politicians have the best of intentions.

“Why should I clean my house? It’s only going to get dirty in a day or two. Best to burn it down and start over.”

The price of liberty is eternal vigilance, so complaining that no reform is permanent rather misses the point.

calbear on July 2, 2013 at 1:12 PM

…announced the principle that they are going to rewrite the tax code from scratch and that the supporters of every tax preference will have to shovel campaign contributions on house and senate members if they want to keep their tax preferencesjustify its continuation.

Akzed on July 2, 2013 at 1:12 PM

Any tax reform should include abolishing the IRS, barring all current IRS employees from working for the new version (because there will be a new version) and no union representation for government workers.

Iblis on July 2, 2013 at 1:34 PM

How about we start with a zero based BUDGET first, THEN figure out how much of a tax rate will provide just enough revenue for it?

And while we’re at it, just eliminate the income tax and go to a national sales tax (NOT a VAT) – and eliminate the IRS at the same time.

dentarthurdent on July 2, 2013 at 1:09 PM

Because then one couldn’t justify the welfare state.

By the way, all a sales tax would do is shift the clamor of who gets the exemptions to Big Business (that, and put a tighter choke chain on the “legitimate” economy).

Steve Eggleston on July 2, 2013 at 1:40 PM

The effort from Hatch and Baucus is well-intentioned, but doomed to failure.

Indeed it is. But do you want to know what else is well-intentioned, but doomed to failure? This:

Real reform would be to get rid of the current income-tax structure altogether, in a manner that ensured Congress couldn’t restore it, either by leaps or by increments. That would take a constitutional amendment to require a flat tax with no deductions, credits, or exemptions, or to eliminate the income tax altogether with a repeal of the 16th Amendment and create a consumption tax instead.

rogaineguy on July 2, 2013 at 1:41 PM

Work harder taxpayers. The witch needs more taxes…to be freed from prison.

Schadenfreude on July 2, 2013 at 1:01 PM

I thought she was vacationing in Africa….

Oh. It must be a bitch having taxpayers foot the bill for such a suckey vacation….

unclesmrgol on July 2, 2013 at 1:44 PM

What do we need taxes for? We already print out enough money to make a decent $1 trillion budget.

LoganSix on July 2, 2013 at 2:12 PM

Have any of these jokers senators read the US Constitution? Tax bills must originate in the House.

Rich H on July 2, 2013 at 2:36 PM

D.O.A.

Carnac on July 2, 2013 at 3:54 PM

All you need to know to understand the depth of the futility here, is that a prerequisite for attempting a revamp of the tax code is that those attempting it must be retiring–or close to it.

The problem with the tax code is…the government…just as the government is the root of virtually every other problem we have. The government will never willingly be downsized. It has to collapse into an inert pile of jello before anything can meaningful can be done.

Vote Democrat. Hasten the collapse. The only way to heaven is through Hell.

PD Quig on July 2, 2013 at 4:24 PM

The real problem isn’t the morass of exceptions built into the tax code; those are the symptoms. The real problem is the ability of Washington to use the tax code primarily for social engineering rather than straightforward revenue collection. Reform that leaves that power intact isn’t reform as much as it is a simple reset, a lesson we can learn from history,

Social engineering through tax policy isn’t the only fundamental problem. Another fundamental problem is the corrupt process that leads to exemptions that serve private interests. Not that Ed doesn’t make the point.

They do need to start over. There is good reason for progressive rates, but virtually all the exemptions should just be eliminated. That broadens the base and allows lower overall rates and largely eliminates the need for the IRS. Everyone should have to pay something, which means a floor or minimum tax.

To prevent unnecessary turmoil, it should be done over a time frame that allows people and businesses who have structured their finances to fit the tax code to make the necessary adjustments.

But there is a very powerful industry that depends on a massively complex tax code for its livelihood. You can expect them to fight for the status quo, using the same lobbying tactics they use to buy advantageous exemptions.

novaculus on July 2, 2013 at 4:29 PM

Baucus, Hatch plan zero-based approach to tax reform

Two liberals reforming the Tax system, this will be worse than ObamaCare and “immigration reform”.

Keep a tight hold on your money, the liberals are coming. We know that they don’t like to waste a crisis.

RJL on July 2, 2013 at 4:44 PM

A drunk and a skunk.

Jaibones on July 2, 2013 at 5:33 PM