The death of tax reform

The White House claims that loophole closing can’t raise enough revenues. This is bogus. The nonpartisan Tax Policy Center has estimated that capping all itemized deductions at $17,000 for couples and $8,500 for singles would produce $1.7 trillion in added taxes over a decade. To be sure, there would be practical problems; some tax increases would fall on households under Obama’s income thresholds of $250,000 for couples and $200,000 for singles. But these could be managed with adequate political will.

Unfortunately, it’s missing. The itemized deductions most threatened would include those for charitable contributions, interest on home mortgages and state and local taxes. Howls would come from affected groups: churches, universities, hospitals (the charitable deduction); builders, real estate brokers and mortgage bankers (the mortgage interest deduction); and state and local governments (the tax deduction). Obama seems unwilling to spend his political capital opposing these groups. …

As important, many politicians support tax breaks for favored groups (the elderly, the poor, small business) and causes (homeownership, attending college, “green” industries). This enhances their power. The man who really pronounced the death sentence for the Tax Reform Act of 1986 was Bill Clinton, who increased the top rate to 39.6 percent rather than broadening the base. As the top rate rose, so did the value of generating new tax breaks. Ironically, many of the people who complain the loudest about Washington influence-peddling and lobbying are the same people who support higher tax rates, which stimulate more influence-peddling and lobbying.