Will we ever get tax and spending reform?
It’s happening again. Rather than work within the well-established, effective framework of tax reform combined with significant spending cuts to balance the federal budget, a leading Senate Democrat has said raising taxes and doing unspecified entitlement reform are the two most important ways to cut the deficit (which, as Tea Party activists know, is not the same as balancing the budget). From The Washington Post’s Wonk Blog:
It’s one of the few things that Democrats and Republicans seem to have agreed upon, at least in theory: Lower tax rates by broadening the base.
That’s what the Simpson-Bowles deficit commission originally recommended. The bipartisan Gang of Six has embraced the idea, and Mitt Romney says it’s how he’ll make his tax reform plan work. But Sen. Chuck Schumer (D-N.Y.) says it’s time to dump the idea as the framework for a deal on taxes and the looming fiscal cliff, arguing that it’s impossible to make it work without either burdening the middle-class or increasing the deficit.
“If upfront rate cuts are the starting point for negotiations on tax reform, it will box us in on what else we can achieve,” Schumer said in a speech Tuesday. “Certain conservatives will pocket the rate reductions and never follow through on finding enough revenue elsewhere in the code to reduce the deficit. Or, if they do, it will almost certainly come out of the pockets of middle-income earners.”
Instead, Schumer proposed that the Bush tax cuts for the highest earners should be permanently junked and the capital gains rate should go up to contribute to a bigger deficit reduction package that keeps tax rates on Americans with incomes below $250,000 from going up. He acknowledged that the tax hikes for wealthy Americans wouldn’t come close to raising enough revenue in the long term to bring down the deficit. As such, he proposes that the tax increases be paired with “serious entitlement reform,” though he declined to suggest any particular changes that Democrats would be willing to put on the table.
As is typical in the minds of career politicians like Senator Schumer, basic reality is not part of his consideration. Consider:
- There is somewhere between a few hundred billion and a trillion dollars in federal tax loopholes – depending on whose estimate you look at – so there are plenty of loopholes to eliminate.
- Schumer ignores the economy-growing power of tax cuts, especially if economically inefficient loopholes are eliminated.
- Third, with faster economic growth due to tax reform, middle-class and lower-income earners will be earning more while paying a small amount of taxes. This is a trade-off in favor of reform, not against it.
- “Serious entitlement reform” is not going to be enough to balance the budget, especially since many in Washington want to wait a decade or more to initiate substantive reforms and by then entitlements and interest payments will have grown dramatically. Whether Washington musters up the courage to reform federal retirement programs, other critical reforms must take place, including reforms in subsidies, corporate and non-corporate welfare, the elimination of departments and agencies, and inefficiencies in the federal government. And these must be initiated in the next one to two fiscal years, at the latest.
- Schumer acts as if lowering rates is the only thing conservatives would support in exchange for elimination of loopholes. In fact, many grassroots and establishment conservatives alike have supported putting at least some extra revenue coming from loophole elimination to deficit reduction directly.
- Proponents of big government often say reformation of entitlement spending is a compromise with proponents of smaller government. This is a farce, as Senator Rand Paul (R-KY) explained to me in an interview in June (emphasis added):
Democrats think working with us on Social Security will bring a compromise. They think we want changes to Social Security and we will agree to bring taxes up. This is wrong-headed. We are not jumping up and down to reform entitlements; we want to fix them because they are broken. The Deficit Commission wanted a “grand bargain,” but the whole concept misses the point.
In light of Schumer’s remarks, I think it is safe to say that almost any hope of a meaningful tax reform and spending reform plan after the election is gone. After all, Schumer is a leading Senate Democrat, and Democrats control the Senate. Which leaves grassroots activists with two real options to push for the changes necessary in federal tax and spending policies: first, make sure people who support Tea Party principles get into office so reforms can be set into place ASAP next year. And second, make thousands of phone calls and e-mails to Congress starting November 13, which is when our elected officials come back from their seven-week campaign vacation to deal with the fiscal cliff coming on January 1, 2013. Constituent pressure is powerful, after all, and could tip the balance towards the necessary reforms Tea Partiers have fought for since Day One.