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The Senate’s Tax Gap



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Today on the homepage, I have a piece analyzing one of the major points of the Senate Democrats’ budget proposal: Their promise to raise $975 billion in taxes to fund new stimulus, replace sequestration, and reduce the deficit, by “eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations” and making sure that the increases “come only from the wealthiest Americans and biggest corporations.” As I lay out, even if it were desirable, that’s not really possible — there simply aren’t that many “loopholes” in the tax code exclusively devoted to rich people and big companies.

Thus, you just have to limit their ability to use deductions and tax preferences, and that doesn’t raise as much revenue as the Democrats’ budget needs. The Senate’s budget directs the finance committee to come up with such an approach, but given that it’s nearly impossible to do so, their budget just replaces sequestration and pays for new spending with hand-waving.

But there’s another good reason they probably won’t produce a plan for such large tax hikes. Max Baucus, chairman the Senate Finance Committee, and Dave Camp, chairman of the House Committee on Ways and Means, explain in the Wall Street Journal today what they’re up to instead: comprehensive tax reform.

While we cannot provide you every detail of the bill today, we can commit to you that we are writing tax reform bills. We’ll look to close loopholes like those used by some lawyers and celebrities to avoid paying the payroll tax on much of their earnings. We’ll make sure that companies can’t avoid paying tax on income they earn in the U.S. by pretending that they earned it in an overseas tax haven instead. . . . We’ve agreed on three fundamental principles to ensure that tax reform grows and expands the economy.

The three principles they lay out: Provide “a boost for America’s families” by simplifying the code, maintaining the progressivity of the current system, and not raising taxes for “low-income and middle-income Americans”; “level the playing field for U.S. employers” by reducing advantages for large corporations and not “put[ting] the U.S. companies at a disadvantage in the global economy”; and ensure “parity for small businesses.”

Neither their principles nor their specifics are particularly heartening. The suggestion that they’ll prevent wealthy individuals from using S-corps to avoid payroll taxes, for instance, would add up to a paltry amount of revenue and address a relatively rare problem (albeit one with some famous practitioners, including John Edwards and Newt Gingrich), and suggests that we haven’t seen the end of talking about specific abusive loopholes and ignoring that their elimination will raise little revenue for either deficit reduction or lower rates. Legislating “parity for small businesses,” further, seems likely to mean more complexity in the tax code, not less. One also doubts that Senate Democrats will actually suggest putting a stop to the fact that the “current system picks winners and losers,” as the op-ed suggests, since that would require eliminating green-energy subsidies.

I don’t expect two congressmen trying to sell their tax plan to come out and say, “We’d like to eliminate the state-and-local tax deduction and limit the R&D tax credit” (to take two large and popular preferences). But comprehensive tax reform, if they’d like to raise revenue or lower rates in a deficit-neutral way, will require such things, and will raise taxes on some middle-class families and some small businesses. It could be worse, though: This means comprehensive tax reform is merely politically difficult, not mathematically so. 



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