President Obama is considering a move for tax "reform" along the lines proposed by the Bowles-Simpson deficit reduction commission, the New York Times reports in a front-page article today.
I'm all for a tax reform that would lower rates overall while getting rid of some of the special favors, tax breaks, and "tax expenditures" built into the tax code. But there's a danger inherent in mixing up tax reform and deficit reduction, two causes that are both desirable but that are not otherwise necessarily related. The Times article signals where this is headed with the headline: "Obama Weighs Tax Overhaul in Bid to Address Debt." The article also asserts that the Tax Reform Act of 1986, passed in the Reagan administration, was designed to be "deficit neutral" — I think the Times means to say "revenue neutral" — though "people in both parties agree that the next tax-overhaul effort would almost certainly have to raise revenues to address the nation's growing fiscal problems."
"People in both parties" may agree with that, but I sure don't. The federal government doesn't have a revenue problem, it has a spending problem. Federal government receipts in 2009 were $2.1 trillion. That's more than the $1.8 trillion in 2003, more than the $1.8 trillion in 1999, and almost double the $1.1 trillion in 1992. It's the spending that's ballooned, to $3.5 trillion in 2009 from $2.2. trillion in 2003, $1.7 trillion in 1999, and $1.4 trillion in 1992.
Tax reform — I prefer to call it tax simplification — is a worthy goal for plenty of reasons entirely unrelated to deficit reduction. Making the tax code simpler makes for more honest government and reduces corruption by making it harder for lawmakers to hand out special favors to lobbyists via the tax code. Tax simplification reduces the amount of time and money taxpayers have to spend on compliance and on hiring lawyers and accountants to figure out the tax implications of every action. It's pro-growth and pro-choice because it allows people to act in response to market-based incentives rather than on all the government-created incentives in the tax code that distort behavior.
But mixing up tax reform with a government grab for even more revenue risks giving tax reform a bad name by associating it with tax increases, which are unpopular. President Obama hopes to take advantage of the flip side of this, trying to give a government revenue grab a good name by associating it with tax reform, which is popular.
If Republicans are smart about this, they'll say to President Obama — great, you want tax simplification, we're all for it, let's talk; you want deficit reduction, great, we're all for that, too, let's talk. But let's make it two separate conversations. Even a tax reform intended to be revenue neutral may have some deficit reduction effects because of the growth it creates. But setting out do deficit reduction via tax reform is a good way to ruin the worthy cause of tax reform.
