Tax Code Reform is an Unrealistic Solution to The Fiscal Cliff


Twice now, Republicans have failed to give any meaningful specifics as to how they will cut deductions to pave the way for the bipartisan Holy Grail of tax code reform. All through the late campaign season, Romney could not deliver those specifics. “Just trust me,” he seemed to be saying; “It would take me too long" to explain, Republican vice presidential nominee Paul Ryan actually said. Now, as Congress is once again gridlocked in fiscal cliff negotiations, Republicans’ dogged commitment to tax code reform rather than tax increases is again marred by the growing impression that reality isn't on their side in backing it up.

As E.J. Dionne Jr. puts it in the Washington Post: “Republicans also say tax reform can raise enough money so we can avoid rate increases on the wealthy. Fine. Let them put forward a comprehensive plan so we can judge it. Their problem is that tax reform can’t produce the revenue that’s needed, but let’s at least see what they have in mind.”

The ringing hollowness of these calls for tax reform should raise a few questions, most importantly: is tax reform in general a realistic goal? And more immediately, is it something that should be discussed as a solution to the ‘fiscal cliff’?

First, tax code reform would undoubtedly be tough work. It would involve manipulating incentives that, together, make up the economic status quo. The mortgage interest deductible would have a drastic impact on the housing market, for example. To lessen the shock, it would require a cautious, slow process of phasing in the changes slowly.

Secondly, it can’t be overstated how politically unsavory such reform would be. Tax benefits are distributed among all income levels. The mortgage interest deductible, for example, is a huge financial help to middle-class families and, not to mention, a struggling housing market. The charitable deduction would also prove politically problematic. The strongest counter to the Democrats’ charge that Republicans are misers voting on low taxes and low regulation is that Republicans simply want more responsible stewards for their money, and that Republican states are indeed the most charitable states in the country. When the elusive goal of tax reform is broken down into the specifics that would actually affect businesses and individuals, it seems unlikely that Republicans themselves would vote on the reform they have made their party’s focal point for deficit reduction.

With all of that noted, though, both sides can largely agree: the tax code is a national embarrassment in its inefficiencies, and simplifying it should be a priority in the next four years. 

So why aren’t Democrats taking it more seriously? Charles Krauthammer, also writing for the Washington Postblames it on the president’s power play. He points out that Obama himself said in 2011 that $1.2 trillion could be generated in revenues without a tax increase but by simply “eliminating some loopholes, eliminating some deductions, and engaging in a tax reform process.” That Democrats are now calling it impossible is a sign of convenient ‘situational mathematics,’ according to Krauthammer.

But Krauthammer ignores the real concern over tax code reform as a solution to the fiscal cliff. Liberal columnists are bending over backwards to get us to call the fiscal cliff the 'austerity crisis' or ‘austerity bomb’ because of just what Krauthammer is doing here. The problem with the fiscal cliff is that the expiration of tax cuts and the beginning of already-mandated spending cuts will result in too much austerity — a level that would bring on another recession. The fact that has been edged out of the conversation by partisans is that the fiscal cliff is about too much deficit reduction all at once. The fiscal cliff talks are supposed to be about managing this fiscal contraction and preventing it from bringing on another recession — not about reducing the deficit.

Summed up, short-term aversion of the fiscal crisis and long-term budget planning are two goals at odds with one another. And redesigning the tax code, not only impossible to accomplish in the month we have, also has no place in discussions on the fiscal cliff.

While Krauthammer and PolicyMic’s own Sal Bommarito convey Democrats' fiscal cliff positions as part of a willfully blind political agenda, there is a parallel narrative: that Republicans are using the alarmist 'fiscal cliff' to leverage the deficit scolds and the push for tax reform. Their own failure to specify those plans should underscore that they are using the suggestions simply as political currency and not as a sensible policy solution to the problem at hand.