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Tax VOX

What will the debt deal mean for tax reform?

Instead of reigning in tax subsidies, the new deal might encourage more of them

By Guest blogger / August 3, 2011

House Democratic leader Nancy Pelosi of California, a critic of the debt deal agreement, walks to the floor of the House to vote on the emergency legislation to avert a government default, at the Capitol, in Washington on Aug. 1, 2011. It turns out, the deal won't be too promising for tax reform, writes guest blogger Howard Gleckman.

J. Scott Applewhite / AP

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What will the debt deal mean for the future of tax reform? Sadly, nothing good.

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The budget agreement is, for tax reformers, a huge disappointment. It is based on the fantasy that the nation can return to a sound fiscal footing through spending cuts only. It entirely ignores the revenue side of the budget. And while a special bipartisan congressional committee representing both the House and Senate (to be called the Gang of 12, I suppose) would have the authority to recommend tax reform later this year, there is no reason to believe it will do so.

Indeed, because the debt deal will limit the ability of Congress to spend money directly, it is likely to encourage lawmakers to expand their use of tax subsidies. Instead of reform, this will only accelerate the trend towards what my Tax Policy Center colleague Gene Steuerle likes to call tax deform.

The new bipartisan deficit committee is set up, in fact, to make it as difficult as possible to fundamentally rewrite the tax code. The panel would be required to find about $1.5 trillion in deficit reduction over 10 years. In theory, it could get the money through either spending or new taxes. But if Congress fails to adopt the panel’s recommendations (assuming it can even agree on a package), the consequence is $1.2 trillion in automatic spending cuts only. Taxes would be exempt from this step.

It is impossible to believe the GOP members of this committee would agree to new revenues. They might support a restructuring that ends some tax preferences and lowers rates but keeps total revenues about where they are (ala the Tax Reform Act of 1986). But the debt deal makes even that difficult.

Here’s why: The $1.5 trillion deficit reduction target will presumably be measured relative to current law, which assumes the 2001/2003/2010 tax cuts expire at the end of next year. As a result, any changes Congress makes in the Bush/Obama rates would probably be scored by the Congressional Budget Office as a tax cut and only add to the deficit.

As for the Democrats, it is hard to imagine that after the concessions they just made on spending, their panel members would buy into any tax reform unless it reduces the deficit.

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