The Baucus-Hatch “Blank Slate” Approach to Tax Reform Could Be Revolutionary

No one quite knows what exactly Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT) mean when they say they will rely upon a “blank slate” as the starting point for tax reform discussions. But done carefully and with political artistry, taking advantage of their unique power, Baucus and Hatch could revolutionize how members of Congress negotiate the future of taxes.

But it’s all in the practice, not the theory. Done right, the strategy could reenergize the tax reform debate. Done wrong, it will be just another dead-end.

The idea of reforming the tax system from a “zero base” or building up from a blank slate is hardly new. And lawmakers always talk about everything being on the table. The challenge is in making it happen.

Baucus and Hatch must accomplish two goals. First, they must shift the burden of proof from those who favor reform to those who would retain the status quo. Second, they must force members to pay for their favored subsidy, denying them the opportunity to pretend it is free.

As a veteran of the Tax Reform Act of 1986, I always emphasize the crucial role of process. Sure, serendipity smiles or frowns unexpectedly on any endeavor, but the ’86 effort took off when Treasury, President Reagan, House Ways & Means Chair Dan Rostenkowski (D-IL), and Finance Committee chair Bob Packwood (R-OR) all put forward proposals that started with specific rate cuts and removal of many tax preferences.

Their plans were all somewhat different, but each changed the burden of proof. Lobbyists won many later battles, but now they were forced to explain why they needed to retain special preferences when others would not be so favored. Moreover, given a fixed revenue target, restored preferences had to be paid for. Lawmakers had to acknowledge that the price of adding back tax preferences was a higher tax rate.

Baucus, ideally with the support of Hatch, can put forward a “chairman’s mark” from which committee members can debate amendments. As both senators have suggested, that mark can be a relatively clean slate. Further, Baucus can require that amendments must not add to the deficit or change his revenue target, effectively requiring members to offer what are called “pay-fors.”

Normally, members debate items one at a time. Each adds a new subsidy without worrying about who pays for it—perhaps those currently too young to vote or the yet-unborn.

In dark times, politicians try to reduce the deficit by figuring out what tax increases or spending cuts will restore order to the budget. But identifying losers is immensely unpopular among voters, and politicians shy away from it. Worse, they blast those from the other party brave enough to provide details.

But if Baucus sets a revenue target at the beginning of this tax reform exercise, the dynamic shifts—from simply identifying winners and losers to explicit trade-offs. Winners and losers march together. With a blank slate or zero base, every restoration of a tax break requires higher rates (even an alternative tax), especially if there are few or no alternative preferences to sacrifice.

This process not only gives new life to a broad rewrite of the tax code but also makes it much easier to reform specific provisions. For instance, tax subsidies for homeownership, charity, and education can be much more effective and provide more bang per buck out of each dollar of federal subsidy. But politicians largely ignore such ideas because they create losers who scream loudly. Thus, the default for elected officials who fear negative advertising and loss of campaign contributions is to do nothing to improve these tax subsidies.

But when the burden of proof changes, a lobbyist can appear to be helping his masters simply by saving a subsidy, even if the net benefit is smaller than in the old law. After all, preserving a preference in some form is success relative to a zero baseline. Of course, as we learned in 1986, this argument grows stronger as the probability of tax reform grows.   Can Baucus and Hatch change the burden of proof and force members to pay with higher rates for the subsidies they want to keep? They can certainly lead their committee and Congress in that direction, but only by specifying precisely a chairman’s mark that sets revenue and rates while slashing tax preferences.

If they do, Baucus and Hatch may force fellow senators to acknowledge that every subsidy must be paid for. And that, in turn, will open a window to design alternative tax subsidies that are fairer and more efficient. This sort of process revolution could remake policy in ways that extend well beyond tax reform.


5 Comments on “The Baucus-Hatch “Blank Slate” Approach to Tax Reform Could Be Revolutionary”

  1. Bob Hungate -If the blank slate is true I wonder if the revenue options will consider historically as non-starters. Will they suggest the option of a carbon tax? Global warming is real, US should lead! Second suggestion, shift medical care costs from payr says:

    If the blank slate is true I wonder if the revenue options will consider historically as non-starters. Will they suggest the option of a carbon tax? Global warming is real, US should lead! Second suggestion, shift medical care costs from payroll tax to VAT. Payroll taxes made sense when industrializing was taking place. That is not where we are now! Third, a transaction tax on financial trades is essential to balancing the financial system. Similarly a tax on currency exchange could help fund World Bank and IMF. I could go on but I think that would be a good start to a great discussion! My guess is we will always need a mix of consumption tax and income tax, but both must be done in a policy way to affect incentives. Those of us who have thrived in this system are paying too little to sustain the system!!

    I always enjoy your comments.

    Bob

    • I agree with shifting payroll taxes to a VAT or to a VAT-like net business receipts tax (which has offsets for employers who provide health care for retirees and employees, an enlarge tax credit and private schools or post-secondary or vocational education, etc.).

      The carbon tax was an attempt to spread deficit reduction to the masses. The VAT is a better idea.

    • The suggestion of a VAT dedicated to healthcare premium costs makes good sense. Everyone wants healthcare, and everyone should pay for it. And, a VAT would assure some progressivity in burden based on consumption.

      Of course, the VAT itself would also make the U.S. more competitive in this era of globalization, as it is added to imports and subtracted from exports. The U.S. is now at a competitive disadvantage in world trade because all our trading partners, including China, use VAT’s.

      The problem is that Sen. Hatch is viscerally opposed to a VAT, fearing another “add-on” tax base. That being the case, the VAT would have its best chance of adoption as a replacement for the Corporate Income Tax, and, perhaps, in addition, as a replacement for the corporate contribution to FICA.

      • Bob Hungate -If the blank slate is true I wonder if the revenue options will consider historically as non-starters. Will they suggest the option of a carbon tax? Global warming is real, US should lead! Second suggestion, shift medical care costs from payr says:

        senator Hatch’s visceral resistance to VAT makes him unable to see the impact of the difference in US taxing systems, loading health care cost onto US manufacturing cost. Very very sad to see a republican in that position!!!

  2. The pay-for idea has merit. I hope they go for it. Getting Obama on board, however, is problematic, as his tax reform goals were met on January second when the ATRA was passed. Indeed, the deficit is smaller than expected – although this may be due to people realizing capital gains prior to the January 1 rate increase. I doubt that the current bump in revenue will continue.

    We must also be wary of unintended consequences. For example, retaining the second mortgage interest deduction in 1986 led to the practice of “cashing out equity” which in large part led to the Financial Crisis of 2008. That is the first thing that should be fixed.

    I made further comments about this topic on Howard Gleckman’s TaxVox post and Bruce Bartlett’s Economix column, which I will repeat below:

    A truly zero based tax reform would put both a VAT, a VAT-like Net Business Receipts Tax and reforms to Social Security (including transferring the employer contribution to either the VAT or NBRT) on the table. The main drivers of the Buffett problem were low taxes on capital gains and dividends (which the Affordable Care Act and the ATRA largely solved) and the fact that high incomes and much of non-wage income is not covered by Social Security Taxes (although HI is). Such reforms would take a commitment by the President or a presidential candidate.

    I don’t see a Democrat offering this, especially not Clinton. Huckabee might offer something like this – although it seems the right is stuck on the Fair Tax. If Herman Cain had been serious, his 9-9-9 would have been 9-27-27, but he was political theater. It will take a new truly liberal party devoted to worker ownership to put forward something like I am proposing.

    Most importantly, because the President got most of his tax agenda on January 2nd, he really has nothing left to do unless he is willing to touch Social Security reform – changing the employer contribution but not the employee contribution and equalizing the crediting of the employer levy so each person is credited with the same amount, regardless of income. I don’t see him doing that, since it invites private accounts.


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