Obama tax deal could start an era like Reagan's
The Obama tax plan, if passed, would build trust between Republicans and Democrats. The next step could be tax simplification. The Reagan-era reforms provided helpful lessons.
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That seems to be the way President Obama is painting his political role over the next two years.
Like Reagan in the 1980s, Mr. Obama hopes to find a bipartisan consensus with Congress for simplifying the tax code.
His first big step toward that goal was to negotiate a deal with the newly empowered Republicans on extending the Bush-era tax rates. He also endorsed some ideas from his deficit-cutting commission, especially those aimed at eliminating most tax deductions, credits, and exemptions. And he has instructed aides to prepare tax-reform proposals.
The Reagan model is appealing – but only in some ways.
The conservative president worked with the reigning Democrats on Capitol Hill to pass the Tax Reform Act of 1986. The law closed many tax loopholes – or “expenditures,” in Washingtonese. And the changes didn’t really raise or lower revenues.
More important, political trust was possible back then. While it took Reagan three years to achieve reform, he was able to do so with a mix of charm, integrity, and confidence-building.
In today’s charged political climate, in which special-interest groups are more powerful than ever, can Democrats and Republicans ever build a similar trust? They might start to – if the Obama-GOP tax plan is passed by Congress.
Trust is essential not only to simplifying the tax code but also to eventually shift the tax burden.
The current debate is about extending tax breaks for the rich and small businesses. That’s more an ideological, campaign-oriented dispute. To restore economic growth, Obama really needs more tax certainty than tax fairness.
Reagan’s reforms were made “permanent,” meaning there was no cut-off date. Obama, however, built uncertainty into the compromise income-tax plan by setting an end date of two years. Republicans, too, also promise to try to alter the plan once they take power in the House next month.
Such political see-sawing and short-term perspectives feed into the uncertain feeling among investors about the economy. Only a long-term consensus about taxes can really help restore growth. As Federal Reserve Chairman Ben Bernanke recently said on “60 Minutes,” fixing the personal and corporate tax codes would “create more incentives for people to invest.”
The Reagan era also points to another aspect of trust, or rather mistrust. While Reagan went along with some tax increases, Democrats failed to fulfill their end of the bargain and didn’t make the corresponding spending cuts.
A similar problem faces Obama.
He and the Republicans may eventually agree on shifting the tax burden by, say, lowering income and capital-gains taxes while instituting a sort of national sales tax (“value-added tax,” or VAT). This would have the advantage of boosting investments and broadening the tax base. Democrats also see a VAT as essential to paying for expanded health care.
But Republicans are wary. Like the lost bargain of the 1980s, Democrats might keep the VAT and later restore the income and capital gains taxes.
Such scenarios call out for Obama and GOP chieftains to find a way to create long-term political trust – which would also help build certainty for business. That’s difficult when Americans are so divided on the role and size of government, and elections have become sophisticated political combat.
One starting point might be for the president and the GOP to agree on an upper limit for government spending as a percentage of the economy. The bipartisan deficit commission proposed 21 percent. Can Obama endorse that figure?
Another starter agreement might be to set a figure for the level of federal debt as a portion of the economy. The commission suggested reducing the debt level from the 70 percent of GDP estimated for 2014.
Agreeing to broad caps on levels of taxes, debt, and spending would set the stage for later talks on the details of how to stay within those caps.
Finding political trust and creating economic certainty should be Washington’s twin goals as the US capital enters a new era of divided government. Obama and the GOP have only started down that rocky path.