Senator Toomey’s Tax Reform Plan

Yesterday morning, House Speaker John Boehner (R-OH) was asked by a reporter:

QUESTION:

Do you, yourself, support the Toomey proposal? And what do you say to consider the critics who call it a tax increase?

BOEHNER:

Well, listen, I think the offer that the Republicans put on the table is a fair offer. Toomey, something like Toomey. It’s important for us to, in my opinion, reform the tax code. We’ve got the highest business tax rate in the world. We’ve got a personal tax system that’s so complicated it costs Americans about $500 billion a year to comply with the current tax code. And I think that reforming our tax code, both on the business side and personal side, will make America more competitive and produce more economic growth. And so I do believe that reforming the code is a step in the right direction.

The details of how we get there, frankly I think has yet to be worked out.

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Senator Pat Toomey’s (R-PA) plan is a scaled down version of what the Bowles-Simpson Commission proposed on pp.28-34 and in Table 17 on p.65 here, eliminate special tax breaks, lower the rates, and leave some for deficit reduction. Toomey discussed his plan on Fox News Sunday. I applaud his effort. Maybe it can become the basis for a Super Committee deal. Committee Democrats quickly rejected the proposal as not have enough tax break reduction to offset the 28% top rates. If so, the top rates would have to be higher, and more tax breaks would have to be taken away, but the principle is there. Just be careful to maintain the same progressivity of the current system or more.

However, tax reform is not some quick fix that will boost the economy in the next year or two. Drafting the initial changes to the law is the easy part — repeal some tax breaks and lower the rates. The hard part is negotiating with those who would end up worse off to avoid unfairness and to ease transitions, where through no fault of their own, taxpayers made economic decisions based upon the old law that get whacked by the tax reform.

Enacting tax reform within the next year would test the limits of legislative possibility. The 1986 Tax Reform Act was drafted and redrafted in several iterations starting in 1978 with the Bradley-Gephardt plan, the 1984 Treasury tax reform plan, the 1985 Rostenkowski plan, the 1986 Packwood plan, and the final compromise 1986 Act. Then individuals and businesses would have to start living with the new tax reform. As new investment is reallocated to more productive uses, away from currently tax favored real estate, energy, and other uses, and as tax subsidized debt is shed, the economy would get stronger AFTER SEVERAL YEARS OF ADJUSTMENT.

This will make it all the harder for the Super Committee to reach a deal which won’t disappoint financial markets or attract another rating agency downgrade, but we didn’t get into this Great Recession in a few years, and we won’t get out of it in a few years either. The American people recognize that all of the quick fixes of the past two years have barely kept our heads above water. It’s time to do the hard work of long term tax reform. That’s asking a lot of a town wedded to quick fixes.

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