Will Romney "Complexify" the Tax Code?

Pressed to explain last week how he would lower tax rates without sacrificing revenues, Mitt Romney suggested that he might cap tax deductions at $17,000 per return. This was entirely different from his earlier suggestion that he'd eliminate some of our dizzying array of tax deductions in pursuit of a simpler and more economically efficient tax system with lower rates but fewer write-offs.

In his latest proposal for reform that started out as a way to simplify our tax system, Romney would make it more complex. The political virtue of this new approach is that it lets him preach lower rates without identifying specific deductions he'd eliminate, and therefore without incurring political opposition from interest groups that fight to protect those deductions. But it's a stretch to call this tax reform as it's generally understood.

Our current system, embracing more than 150 different deductions, is not merely complex. It also distorts our economy by prompting taxpayers to do things with their money in pursuit of a lower tax bill they wouldn't otherwise. Thus we invest more in housing thanks to our generous mortgage interest deduction, providing the housing sector with a disproportionate place in our economy.

Back in 1986 a Democratic Congress and a Republican president cooperated on tax reform that simplified the code by eliminating some deductions and lowering rates. That effort succeeded because all the major players involved, from the liberal Democrat Bill Bradley to the supply-sider Jack Kemp and President Reagan, believed in the same general idea, namely that lower tax rates and fewer deductions are less intrusive and better for the economy than a system of higher rates and more write-offs.

Since then we've abandoned the approach those reformers took and added back dozens of deductions. President Obama has countenanced more or less the same approach as Romney, advocating capping rather than eliminating deductions.

Everyone in Washington, it seems, has a favorite tax write-off or two that he is trying to protect. Back in December of 2010, for instance, Congress rolled about 130 different deductions that were about to expire into one mammoth piece of legislation called a ‘tax extenders' bill that was supported by an ideologically diverse array of interest groups for no other reason than they all had some favored loophole they wanted to preserve. The bill passed with virtually no discussion of the effectiveness or necessity of any of these deductions because everyone in Congress had some stake in seeing it passed.

President Obama's own Simpson-Bowles Commission on deficit reduction took a different approach. Recognizing that tax reform which focused on negotiating every one of those more than 150 current expenditures in or out of the code would be impossible, the commission recommended beginning reform by eliminating every tax deduction, to the tune of $1 trillion in savings.

Then, the commission recommended, Congress should add back into the code a few big deductions focusing on areas that Washington deemed important enough, although in each case the commission argued for a new, less rich deduction. One could debate heartily what those few deductions that are added back should be. Simpson-Bowles wanted one for home mortgage interest, though limited to first homes and capped at $500,000 in mortgage value. The commission also wanted to put back a deduction for charitable giving and tax credits for low-income workers.

As the commission's staff noted, if the federal government eliminated every tax deduction we could cut the top tax rate to 23 percent and every other rate in similar fashion, and still have money left over to reduce the deficit. For every deduction you added back, the commission noted, you needed to raise rates. The commission's target was something less than 29 percent as the top rate.

Romney's approach, by contrast, makes our inscrutable tax code more complex and it invites a new battle among special interests who will jockey for exemptions for their preferred deductions from the $17,000 cap. I suspect that Romney took this approach because he's been reading and hearing so often how impossible true tax reform would be, not only because both parties love the special-interest dollars that flow into tax-writing legislation, but also because, according to critics of tax reform, everything from finance to politics is different today from 1986.

Still, in 1986 our country faced what was, at the time, a historically high budget deficit, too. President Reagan himself wondered whether a knock-down, drag-out fight for tax reform made sense in that environment, but he became convinced that a better tax code would help unlock economic growth.

Reagan also faced an intensely divided political environment in which, ironically, many conservatives opposed tax reform because they saw it as primarily a liberal effort to eliminate valuable tax credits for business. But Reagan and Kemp changed the conversation by arguing that marrying the removal of loopholes and special deductions in the code to lower rates would be far more beneficial to the economy than the complex system then in place.

Still the 1986 effort seemed like such a long-shot because, so the argument went, the average taxpayer didn't want to give up his favored deductions, either. But as Reagan himself said at the signing of the bill, "as usual the pessimists left one thing out of their calculations, the American people," who were willing to accept reform when it became clear that the new system would be more transparent and fairer.

As the Washington Post wrote in a headline after the 1986 reform passed, "The Impossible Became the Inevitable." This was precisely the kind of narrative about America that Reagan loved. You would hope that Romney would find it compelling, too.