The late economist Milton Friedman argued that only a crisis produces real change — that things that are politically impossible become politically inevitable only at watershed moments.
According to political analyst Andy Friedman of The Washington Update, tax reform, however much favored and seen as necessary by policy advocates and ordinary Americans, remains far from inevitable.
In his most recent report, Friedman cites his namesake in his analysis of the current tax reform proposal by House Ways and Means Committee chairman David Camp, R-Mich., and explains why Camp’s fellow Republicans and Democrats alike are backing off the effort to lower rates and close loopholes.
Friedman explains the high political hurdles for comprehensive tax reform — last undertaken in 1986 under President Reagan — in terms of the principles and objectives or the tax code changes envisioned.
He explains that Democrats generally approve of tax reform that raises revenue, while Republicans adhere to a philosophy that tax-code reforms be revenue neutral.
Both Reagan’s and Camp’s proposal are in the revenue-neutrality camp, which necessitates that resultant tax-code changes not favor the wealthy in order to be politically viable. Writes Friedman:
“Because wealthy taxpayers typically have the most taxable income, they save the most in taxes when tax rates are reduced. If the wealthy save taxes and the overall reform plan is to be revenue neutral, then middle- and lower-income taxpayers must pay more taxes to make up the difference.”
If the wealthy are not to come out ahead from tax-rate reductions, then the closing of loopholes and elimination or curtailing of deductions become practical necessities.
That means changes to politically sacrosanct items such as the mortgage interest deduction or tax-free municipal bonds that have vocal and powerful defenders in Washington.
Camp’s proposal adheres to these principles and therefore faces these political hurdles. The plan would reduce the top tax rate from near 45%, including the Obamacare surtax, to 25%, and adding a 10% surtax on household income above $450,000 would render the top rate effectively 35%.
(The surtax would, controversially, apply not just to wages but to muni bond interest and employer-provided health insurance, and would preserve the new Obamacare 3.8% surtax on investment income, Friedman adds.)