Real Clear Politics

When Washington confronts our crushing debt burden – and we will confront it either by choice or crisis – the solution will follow a path that is largely accepted among policymakers on both sides. Some form of comprehensive tax reform that lowers rates and broadens the tax base will accompany or precede fundamental entitlement reform. Put another way, tax reform is the policy and political bridge that will help us achieve a grand bargain and avert a European-style debt crisis.

As a matter of policy, tax reform is critical because it will help us create real growth and jobs like no other reform. Tax reform won’t just give us a tune up; it can help rebuild our economic engine for the 21st century. We waste more than $350 billion on tax compliance every year according to the Tax Foundation while another $2 trillion is sitting on the sidelines, due in part to uncertainty in the code. The last time Congress reformed the tax code was 26 years ago, which preceded the longest peacetime economic expansion in our history. Our country desperately needs that kind of growth – and revenue boost – again to help us avoid the collapse of our safety net.

As a political matter, tax reform is essential because it will build a coalition that will make a grand bargain possible. Tax reform is a form of stimulus everyone is for, but perfect tax reform won’t be enough to avert a catastrophe. We have to embrace fundamental entitlement reform: If we don’t, entitlement programs won’t exist for the next generation. That means Democrats will have to back safety net fixes that are unpopular with their base while Republicans will have to agree to revenue increases. The only way to avoid this path is for either side to run the table in the next two elections, which is a delusional expectation. Yet, in this moment, as at our founding, the path of compromise is the path of principle. Doing nothing is selling out and will lead to massive tax increases and benefit cuts for future generations.

Given tax reform’s importance to our nation’s long term fiscal health, most Americans would expect Congress to take steps now to reform the tax code. Unfortunately, the Senate Finance Committee’s meeting before Congress left for vacation was a victory for business as usual. The committee punted on tax reform, extended special interest tax breaks and put another $150 billion on the nation’s credit card. The headline in Lori Montgomery’s piece in the Washington Post summed it up well: “Special interests win in Senate panel’s attempt at tax reform.”

The votes on a few key amendments show that the real divide is between special interests and the rest of the country, while the partisan divide in Washington is partly artificial and subject to role reversals.

One key vote defined tax expenditures – special interest provisions and carve-outs in the tax code – as spending. The amendment required business recipients of federal tax credits to be included in the USAspending.gov website as a recipient of federal funding. The amendment was defeated 10 to 14 mostly along party lines with every Democrat on the committee opposing with the exception of Tom Carper (D-DE).

The vote has big implications for tax reform – and it was a mixed bag for taxpayers. On one hand, it showed that Republicans have taken real strides toward intellectual honesty in the tax reform debate. Republicans, in spite of their public statements otherwise, understand that every tax earmark is a tax increase on the special interest group that doesn’t receive the benefit. In other words, special carve-outs keep rates artificially high in order to compensate for the loss of revenue that comes from senators using the tax code as a parochial playground.

Reagan’s key economic advisers such as Martin Feldstein persuasively argue that tax extenders are spending by another name. If tax carve-outs for green industry, rum makers, Eskimo whaling captains, and more, were on the other side of the ledger – such as in President Obama’s stimulus bill – they would be derided as spending, and rightly so.

Democrats, on the other hand, largely sided with tax lobbyist Grover Norquist in treating these tax earmarks as “tax cuts” that need to be protected at all costs. In addition to broadly opposing designating tax earmarks as spending, Democrats – and some Republicans – also voted to protect tax earmarks for the makers of energy efficient appliances; the wind industry and the new market tax credit that conveys special tax benefits for film studios, yacht manufactures, doggie day cares and day spas. By advocating a “balanced approach” do Democrats mean each special interest gets its place at the trough? That’s hardly the kind of fairness the American people deserve.

The American people are tired of politicians playing venture capitalists and picking winners and losers through the code, particularly while they blame tax lobbyists for their bad votes. The fact is we don’t do venture capitalism well from the Senate Finance committee. Those are decisions best left to the market and real job creators. Our interference, however well-intentioned, creates crony capitalism and massive debt. We still have time to avert a calamity but the Finance Committee’s defense of the status quo is the kind of detour we can’t afford.

- Published in Real Clear Politics, August 13, 2012