A Camp-ground for Tax Reform

This post originally appeared on TaxVox, the Tax Policy Center blog.

By proposing a far-reaching and detailed rewrite of the Revenue Code, House Ways and Means Committee Chair Dave Camp (R-MI) did something very few elected officials have done in recent years: He stuck out his neck and proposed radical reform. The initial press response has focused on politics and concluded that neither Republicans nor Democrats will be able to take on the special interests, that there is too much partisan gridlock, and that the plan is going nowhere.

But such responses largely ignore the history of successful reforms and forget that some policymakers do care about policy. If the goal is to conquer a mountain, someone has to start by building a common basecamp.

Almost any major systemic reform that does more than give away money creates losers. Someone always has to pay for whatever new use of resources the reform seeks—in this case, tax rate reduction and a leaner code with fewer complications. But politicians hate identifying losers. We voters punish them for their candor, which is why they nearly always increase deficits to achieve their goals and leave it to a future Congress to identify the losers who pay the bill.

With his full-blown tax reform proposal, Chairman Camp decided to lead and proposed repealing many popular tax breaks. There’s a lot I like and some things I don’t like in his proposal, but the simple fact is that a well-designed comprehensive alternative to current law can change the burden of proof. Change a few items, and each interest group argues that it was unfairly picked on. Put forward an alternative that takes on almost all preferences, and each interest then needs to justify why it deserves special treatment not accorded others.

The prospect for any reform is nil if no leaders do what Camp did and step up to the plate. The process is not one of instant epiphany. Rather it slowly builds support. Those who first propose change may increase the odds of success from 5 percent to 10 percent. Others who follow further improve those odds.  If we reject out of hand all ideas that start with less than a 50 percent chance of success, we’d probably never reform anything.

It often takes modest support by others to move the process forward.  In 1985, President Reagan and House Ways & Means Committee chair Dan Rostenkowski started the legislative process that yielded the Tax Reform Act of 1986 by simply agreeing not to criticize each other while the measure went through committee. Like Speaker Boehner today, Speaker O’Neill wasn’t enthusiastic about reform then, but Rostenkowski was able to proceed anyway.

In 1985, Rostenkowski knew he could pass a Democratic bill. But he knew it would go next to the GOP-controlled Senate Finance Committee. Each party would have a turn and a final agreement would come from a bipartisan conference committee. If House GOP leaders let Camp mark-up his bill now, Democrats would have their turn, at least this year, in the Senate. At least so far, both President Obama and senior Ways & Means Democrat Sandy Levin (D-MI)  have avoided any major criticism of Camp’s plan, but one wonders if Democrats aren’t going to forego an opportunity, once again joining Republicans in deciding in advance that nothing substantial can be done, so it won’t.

Leadership is seldom about achieving results that can be predicted with certainly. More often it requires using your clout to change the process or reframe the debate in ways more likely to serve the public. It’s certainly about more than protecting your party’s incumbents in the next election regardless of the policy consequences.

When I served as economic coordinator and original organizer of the 1984 Treasury study that led to the ’86 Act, it was a time when books declared major tax reform the “impossible dream.”  Sound familiar? In the face of that dispiriting commentary, I tried to encourage the Treasury staff with what I call the “hopper theory” of democracy: the more good things you put in the hopper, the more good things are likely to come out. By this reckoning, Chairman Camp has already won.


Can the Modern Politician Call Us to “Place Our Collective Shoulder to the Wheel”?

Whom do we remember as our greatest presidents? Often, the ones who call us to act on a higher plane, to be more than we have been. Some leaders stand out in every list: Washington, who led us through a treacherous beginning; Lincoln, who saved the nation; and FDR, who led us against perhaps the most evil axis of nations in history. But let’s add others: Truman, with his leadership on the Marshall Plan and postwar communist containment; and Jefferson, with the purchase of the Louisiana Territory.

Similarly, when we think about which rhetoric inspires us, we don’t usually quote the language used to back the latest farm bill or tax break. Ever undergo the emotional transition at the Lincoln memorial from feeling touristy and tepid outside this behemoth boulder building, to turning teary as you read the second inaugural address? You may not have noticed, but one line in that address mentions a new government program:

 Let us strive on to finish the work we are in, to bind up the nation’s wounds, to care for him who shall have borne the battle and for his widow and his orphan, to do all which may achieve and cherish a just and lasting peace among ourselves and with all nations.

Did you find it? Look again at how it’s worded. Lincoln didn’t promise that he would do something for widows and orphans; he called us to add that task to the many sacrifices we still needed to make.

Now consider President Obama’s State of the Union address. I don’t mean to pick on it, as it largely followed the format to which for several decades we have become accustomed. Its emotional high point wasn’t when he listed all his proposals but, at the end, when he extolled the sacrifices of Army Ranger Cory Remsburg.

Men and women like Cory remind us that America has never come easy. Our freedom, our democracy, has never been easy. Sometimes we stumble; we make mistakes; we get frustrated or discouraged. But for more than two hundred years, we have put those things aside and placed our collective shoulder to the wheel of progress—to create and build and expand the possibilities of individual achievement; to free other nations from tyranny and fear; to promote justice, and fairness, and equality under the law, so that the words set to paper by our founders are made real for every citizen.

Remsburg, by the way, was on this tenth tour of duty in Afghanistan and Iraq, when his life underwent dramatic upheaval.

Now consider what the president and his Republican counterparts, in their follow-up addresses, ask of us. For the most part, to accept more goodies: more benefits or fewer taxes somehow paid for by someone else. Fortunately, they tell us, we don’t have to put our shoulder to the wheel of progress; we only need to move aside others who block it from rolling forward.

Therein lies a great tragedy of politics and one of the greatest threats to the functioning of democratic government: politicians’ need to tell us about all the great things they will do for us, usually combined with their plodding efforts to tell us that the source of our nation’s problems is those who don’t agree with us. And the great focus they place on “I,” as in I—not you, not we—am going to make all these good things happen. Try to find “I” in Lincoln’s great addresses.

Yes, I recognize that few politicians can win elections without playing this game. Still, I don’t find myself inspired by the tax cuts or extra government benefits I might receive. I’m not moved by the call for others to sacrifice for me. I’m not motivated to do more for posterity by contemplating what you should be doing.

I’m not suggesting that sacrifice has merit in and of itself. When we make such efforts, we do so because we expect that society will benefit in the long run. But not now, when we must give up our time or energy or resources at building that better world. And not necessarily us.

One of the most popular Old Testament verses, sung and read repeatedly in churches and synagogues, comes from the most quoted of all of the Hebrew prophets:

Then I heard the voice of the Lord saying, “Whom shall I send? And who will go for us?” And I said, “Here am I. Send me!” (Isaiah 6:8).

Even if we continually vote out of office any politician who asks us to sacrifice something to make the world a bit better off, we still want to be called. We want collectively to put our shoulder to the wheel. Thanks, Cory. I hope I have half the courage in dealing with these mundane issues that you display in dealing with life and death.


Finding an Opportune Way to Expand the Earned Income Tax Credit

President Obama announced only one major new proposal during last night’s State of the Union address. Here’s what he said:

I agree with Republicans like Senator Rubio that it [the EITC] doesn’t do enough for single workers who don’t have kids. So let’s work together to strengthen the credit, reward work, and help more Americans get ahead.

Having worked on the EITC and other wage subsidies for a long time (and having introduced them at a crucial stage of tax reform efforts in the 1980s), I say it’s about time they were back on the table. Particularly since the onset of the Great Recession, policy discussions around helping those with lower incomes have focused on unemployment insurance, food stamps, and government-subsidized health insurance. Employment needs to move toward the front of our public policy agenda.

As necessary as these other social safety net programs might be—and am not trying to assess their merit here—they generally do not encourage people to stay in the workforce. Like the welfare of old, before the onset of reform of what then was Aid to Families with Dependent Children (AFDC), they provide the greatest benefit to those who do not work at all.  While it’s debatable whether a simple EITC expansion increases total labor supply, there is almost no doubt that per dollar of cost it increases employment more than many other social welfare provisions.

Employment has been a vexing and growing challenge for the American economy. The share of all adults who work—also called the employment rate— was declining even before the Great Recession, particularly among the young and the near-elderly. Indeed, a declining employment rate represents a far bigger and longer-term issue than unemployment, since the NON-employment rate includes both those who are unemployed and those who drop out of or never join the labor force.

Concern over employment makes wage subsidies fertile ground for bipartisan consensus, if—and this is a big “if” in these partisan times—both sides can claim victory from the deal.

Consider the history the EITC. Almost every president since Richard Nixon has signed legislation establishing the EITC, expanding it, or making some provisions permanent. And it’s been bipartisan. The  initial enactment and the largest increases all occurred under Republicans—Ford, Reagan, and George H.W. Bush, while the expansion during the Democratic Clinton administration was also quite significant.

Many who backed these legislative changes did not view the credit in isolation. They often favored it over some alternative—welfare for Senator Russell Long (the EITC’s first champion) and a minimum wage increase for President George H.W. Bush. Or they accepted the EITC as part of a broader tax or budget package. The EITC was never the subject of stand-alone legislative action.

That leads us to today, and what compromises might be supported by both political parties. I suggest two possibilities.

One, following our historical pattern, is to expand the EITC as an alternative to other efforts. At some point, recession-led unemployment insurance expansions will end. A bill to increase the minimum wage might go nowhere. Might an expanded wage subsidy be a compromise?  A broader tax or budget bill always presents possibilities. The EITC offers one way to mitigate the net impact on lower-income populations, whether offsetting  losses from new deficit reduction efforts, or ongoing cutbacks due to sequestration or dwindling appropriations.

The other is to tweak the EITC so it interacts better with other policy goals, such as reductions in marriage penalties—a cause often advocated by Republicans. The childless single workers identified by the president are not the only ones left out of any significant wage support. So also are many low-income married workers. Despite recent changes, the EITC still creates marriage penalties, particularly if a low-wage worker marries into a household already receiving the maximum credit. Such a low-wage worker often fares worse than a single person who gets nothing or almost nothing: once added to the household, the additional worker’s income can phase out his partner’s’ EITC benefits and reduce or eliminate any previous eligibility for other public benefits. Current government policy announces that it is more advantageous to stay unmarried.

Simply expand the current, very small, credit for childless single people, and marriage penalties would multiply in spades. I suggest including in any expansion low-wage workers who decide to marry or stay married, not only those single persons left out. Such an expansion would proceed largely along the same lines as the president’s, but also reduce marriage penalties .

In sum, the president’s best path to bipartisan support for the EITC is to stress more policies that favor employment, offer the expansion as a compromise from other efforts less favored by his opposition, and reduce marriage penalties.


The Budget Deal: A Tentative Step Forward

In a recent Washington Post article, I characterized any forthcoming budget deal as two parties who had dug a hole for themselves deciding to stop throwing shovels at each other. Despite this skepticism, I must admit that this December 2013 agreement is certainly better than throwing shovels—or, more formally, threatening another government shutdown, along with its attendant costs on the workings of government, the well-being of citizens, and economic growth.

This budget agreement also takes a couple of baby steps forward. For the first time in a while, it includes modest reforms to mandatory programs, not just discretionary programs. It cuts back slightly on the silly sequester. Perhaps more important, it gets the two budget committees functioning again. Traditionally, members of these committees have had to fight with the rest of Congress as much, if not more, than with their opponents within the committees—partly because committee members, regardless of affiliation, shared the objective of getting the budget into some sort of order.

If the committee members have really decided to restore their status, and if they are constrained by other congressional leaders from making significant headway on the budget in the months leading to the next election, I hope at least they will start working on bipartisan budget process reforms, such as reducing the game-playing in future budget agreements. One example is greater constraints on future legislation that increases long-term deficits. A trick still possible (but not used in this deal) is to avoid scoring or counting costs against a bill when they fall outside an arbitrary ten-year budget window.


Nelson Mandela and the Formation of a Nation

A few years ago I visited a history museum in an Eastern European nation that had recently abandoned communism. It was quite depressing. In one room I could read about oppression under ancient royalty, in the next oppression under Hitler, in the next oppression under communism. I became acutely aware of how lucky I was to live in a nation with a positive history and legend about its founding and development, and the related ability to triumph over evils, internal and external, ranging from slavery to fascism.

A person like Nelson Mandela takes his country onto a higher plane. He serves as a beacon and inspiration for new generations. When the South African government falters, as it will over time, Mandela’s legend will continually call the people back to a time when hope for progress drove the nation.

Any country’s story of itself evolves from the actions of its heroes and the mythology (in the most positive sense of that word) that surrounds them. In the United States, our teachers and textbooks teach our schoolchildren to try to emulate our Washingtons, Jeffersons, Lincolns, Roosevelts, and Kings. With their leadership, we—and our nation—seemed to move to a higher and better plane. We don’t have to count on our Millard Fillmores to inspire us, even if plenty of them still seem to be around.

I worry greatly about those countries without heroes to inspire their citizens. People in Russia or Egypt may come to tolerate a Putin or a Mubarak-like successor because many of them haven’t known anything better. Despite the formidable talent of the Chinese people, they still look back to a Mao rather than a Gandhi for thinking about what their nation can become—giving India, in my view, an extraordinary leg up for development in this still-young century. In a country with true national heroes, the citizens come to see themselves as part of an evolving and perfecting culture. Failures aren’t tolerated as the way of the world but seen and actively opposed as obstacles to progress.

In this way, Nelson Mandela lives on—and will do so for centuries to come.


Sixteen Days in January: A Story of the Next Shutdown

Dateline: January 2014. Federal government shuts down completely.

Day 1. Mall, Washington, DC. Park Police decide shutdown again requires barring access to war memorials and the grounds of the Washington, Lincoln, and Jefferson monuments. Veterans rise up in anger and push back barricades. “If you’re furloughed, how can you keep us from entering the parks?” asks Joe Laploski, an Iraqi veteran from New Rochelle, NY. Park Police assign unpaid legal interns to determine whether Park Police should arrest themselves for working.

Day 2. White House. In hastily called press conference, President Obama announces major plan to deal with the national emergency. Enforcement on malls will be sustained, lest someone fall in the Tidal Basin and sue the government. Government debt will thereby be reduced, since Park Police cost less than those future lawsuits, at least on an expected basis.

Day 3. Capitol. Lights go out. Speaker Boehner lost underground. Democrats offer to fund search party, but, invoking the Hastert rule (requiring agreement by a majority of the majority party to act) and unable to decide whether they want to find him, Tea Party refuses.

Day 4. Longworth House Office Building. Democrats send search party after Boehner anyway. Find flasks of aged whiskey hidden by the late former Ways and Means Committee Chair Wilbur Mills two levels below the committee room where he presided. Debate ensues over whether imbibing is an essential government function. Inspired by former Occupy Wall Street supporters, Democrats decide to represent the activity as unity with the “99 percent,” who normally can’t afford such expensive booze.

Day 5. Treasury Department. Electronic payments of billions of government checks and bills stop. Secretary Lew called to emergency meeting at the White House to determine how much blame to assign to Republicans.

Day 6. Oklahoma City. Local Tea Party members claim the IRS is targeting them, citing delayed refund checks as proof. Back in Washington, House Oversight and Government Reform Committee decides to hold hearings in the dark.

Day 7. Near Capitol. Republican staffers gather at a local bar to debate how to get work done during the impasse. Consider asking the guy in charge of the lights for help, until they discover that position no longer exists because of the sequester. Boehner still missing.

Day 8. White House. President Obama plans national address during primetime. He asks the Democratic Party to pay for the speechwriters. Local TV stations refuse to broadcast the president’s speech unless their invoices for airing “Army Strong” recruiting commercials are paid.

Day 9. Treasury Department. Secretary Lew tries to issue checks to TV stations. In a 5-4 decision, the Supreme Court bars him from doing so until he lays out the precise legal priority for billions of unpaid bills.

Day 10. Princeton, NJ. Despite the worldwide recession induced by the shutdown, foreigners still flock to outstanding US obligations, and interest rates on US government securities tumble instead of rise. In a New York Times op-ed, Paul Krugman argues that at this low rate we should borrow all we can—unless it would pay for a Republican tax cut.

Day 11. Treasury Department. In response to the House Oversight Committee’s hearings, Treasury’s Inspector General issues report that Republicans were indeed targeted, indicating as proof that their delayed refund checks were bigger on average than those for Democrats. However, no crime was committed, he asserts.

Day 12. White House. President issues a statement that IRS targeting of Republicans is inexcusable. Fires top IRS data processing personnel and replaces commissioner with top executive from Avon Products with an unblemished record in taxes and data processing because she has never worked in either field.

Day 13. Sacramento. Governor Brown announces that millions of Californians are now insured under Obamacare. He asks that no penalties be assessed on those getting thousands of dollars in excess benefits since recordkeeping was impossible. On Meet the Press, Senator Cruz expresses amazement that the shutdown he favored affects every government program but Obamacare.

Day 14. White House. President Obama launches new peace initiative. He asks Hassan Rouhani of Iran and Bashar al-Assad of Syria to hire their own nuclear and chemical weapons inspectors, claiming that the U.S. shouldn’t have to pay to clean up other countries’ messes. President Putin offers to mediate and contribute Russian oil revenues.

Day 15. Capitol. Boehner found. Claims, like always, he knew exactly where he stood. Negotiates agreement with president on a continuing resolution to fund government until after congressional elections. Congress then shuts itself down until December 2014.

Day 16. Russell Senate Office Building. Before departing, Chairman Camp of the Ways and Means Committee and Chairman Baucus of the Senate Finance Committee issue a 6,700-page document with complex details on how to structure a major tax reform. Congressional leaders promise to take up issue immediately…in the next Congress.


What Do Mark Mazur, Lois Lerner, and J. Russell George Have in Common?

Until recently, few Americans knew the names of these three Treasury officials, long-time public servants whose talent and many years of hard work elevated them to prestigious government positions. But many now recognize, if not their names, the issues with which they have been intimately associated. Each has moved into the spotlight recently after putting out a statement, report, or blog dealing with a very controversial aspect of tax administration: employer mandates under the new health care reform law, or Obamacare, in the first case; and tax exemption for social welfare organizations with such labels as “tea party” or “progressive” in the last two.

What Mazur, Lerner, and George also hold in common is the forced assumption of greater responsibility than is warranted, as elected officials and their top appointees—those who wrote or failed to fix the laws in the first place—scramble to secure a position of innocence and fault-finding in the blame game known as Washington, DC.

Mazur is the Assistant Secretary of the Treasury who first revealed in a blog posting the delayed implementation of one important feature of Obamacare, the mandate on larger employers to pay a penalty if they don’t offer health insurance to their full-time employees. Lerner is the IRS official, now threatened with criminal charges by politicians, who first noted that some of those under her had inappropriately targeted “tea party” and other groups for extra review when they applied for tax exemption as social welfare organizations. George is the Treasury Inspector General whose report on the IRS targeting of tea party groups is now being lambasted by Democrats for failing to note sufficiently that the IRS was simultaneously scrutinizing other applicants, such as progressives.

Should we focus so much attention on the talents of Mark Mazur in regulating, Lois Lerner in enforcing, or J. Russell George in inspecting? (I may be influenced by that fact that I know two of them, but I can assure you that many others would say that each is well above average in integrity, ability, and devotion to the public.) Or should we instead turn our attention to how the government turns inward when it functions poorly, the system creaks, and officials remain at an impasse to fix things everyone has long known are broken?

Every expert on nonprofit tax law will tell you that providing tax exemption for organizations operated for social welfare purposes (“exclusively” under Code section 501(c)(4), but “primarily” under the IRS’s more lenient regulations) does not mesh easily with organizations set up to engage in significant political activity. Also, delays in getting exemption have been an issue for years for nonprofits in general because of lack of IRS staffing, extensive abuse of the law, and the difficult-to-enforce boundary lines between exempt and nonexempt activities, the latter including political campaigning. And if there were an easy way to figure out which organizations really devote themselves to social welfare, why hasn’t the White House or any member of Congress come up with one? If things go amuck in some IRS Cincinnati office, wasn’t error built into the system a long time ago?

As for the health care reform law’s employer mandates, of course these were going to put extraordinary pressures on employers to hire part-time rather than full-time employees, on payroll and other reporting systems to devise ways to measure hours of work (however inaccurately), and on an understaffed IRS to somehow enforce the law’s requirements. If things go amuck, how much responsibility rests with Treasury and IRS versus a political system that can only vote thumbs up or thumbs down on Obamacare?

Rest assured, when new benefits are bestowed on citizens, messages spew forth from elected officials and their spokespersons in the White House and Congress. “Look what we have done for you,” they pronounce. Can you remember top White House and Treasury officials ever deferring preferentially to Mark Mazur to make one of these more politically appealing types of announcements?

When things unravel a bit, however, roles reverse. Elected officials and their top cadre quickly disassociate themselves from both the creation of the problem and their past failure to address it.

Wouldn’t it be a lot more honest to share responsibility for successes and failures, more helpful to reveal rather than hide the limits on tax administration, and more productive to spend more time on fixing than blaming? As long as every difficult issue threatens to become political high theatre, the Mazurs, Lerners, and Georges of long government service will be asked to play the role of clown or villain for scripts they can, at best, edit but not write.


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.