The Wyden-Gregg bipartisan tax reform plan: A familiar pattern

Sen. Judd Gregg (R) of New Hampshire and Sen. Ron Wyden (D) introduced tax code reform legislation Tuesday in Washington. Their reforms are a step in the right direction, but are far from bold. 

Sen. Judd Gregg (R) of New Hampshire (r.) and Sen. Ron Wyden (D) (l.) of Oregon wrap up a news conference to introduce tax code reform legislation Feb. 23, 2010 in Washington.

I do like that Senators Wyden (D-OR) and Gregg (R-NH) have worked together in a bipartisan manner to come up with a tax reform plan that lives up to the term “reform” (as in “improvement”) by actually broadening the tax base and eliminating some tax expenditures that seem to have little economic justification.  But a read through their own op-ed in today’s Wall Street Journal suggests how they chose which particular tax expenditures to eliminate and which to keep (emphasis added):

By streamlining and modernizing the outdated tax code, our proposal would eliminate many of the specialized tax breaks that currently benefit one group of Americans over another. The changes we propose will create policies that benefit everyone. They include: fiscally responsible middle-class tax cuts, business tax breaks to help American companies compete globally and create jobs, and a fairer and simpler tax system for all Americans…

We make fiscally responsible tax reform possible by eliminating many of the specialized tax breaks strewn throughout the tax code. Our legislation maintains the most popular tax breaks like the mortgage interest deduction and the health-care tax exclusion, while eliminating specialized exemptions such as a company’s ability to deduct as a business expense punitive damages resulting from lawsuits.

Our legislation also eliminates tax incentives that encourage American businesses to keep more of their foreign earnings overseas and export jobs by repealing the rule that allows U.S. companies to defer taxes on foreign income. And we take a hard line on corporate welfare by directing the Congressional Budget Office to examine the roughly $90 billion that the federal government spends to subsidize businesses directly and indirectly each year. These steps not only make the tax code simpler and fairer for everyone, they reduce opportunities for individuals and businesses to cheat the system and avoid paying their fair share…

The pattern is familiar:  even in base-broadening tax reform, avoid raising taxes on “real people” and instead reduce tax preferences that currently benefit “evil corporations”–or otherwise attack things that seem to fall under the “waste, fraud, and abuse” category.  Note that the proposal only directs CBO to “examine” tax expenditures, and only the corporate ones at that.  Wyden and Gregg make a point of preserving the “most popular” tax expenditures and specifically point out their keeping the mortgage interest deduction and the health-care exclusion.  Just because these are “popular” doesn’t mean they’re (economically) “smart.”  The two examples touted are in fact the two single largest tax expenditures in the federal budget–the mortgage interest deduction costing more than $100 billion per year, and the health care exclusion more than $150 billion per year (each more than the value of all corporate tax expenditures combined).  Eliminating the health care exclusion alone would be enough to get the 2015 deficit down to the Administration’s goal of 3 percent of GDP and would promote greater efficiency in the health care market by bringing out of pocket prices more in line with the true cost of health care (thus helping to damp down excess demand and ultimately bring down health costs).  But any good politician would ask:  why would we want to do that if it means so obviously raising taxes on real people–even if it would work to reduce health costs over time?…

And that’s why it’s hard to be popular and smart at the same time.  And if politicians propose a “bipartisan” tax reform plan you can be sure it looks like it gives more away than it takes and probably doesn’t do as much to truly “reform” the tax system as is advertised.  The Wyden-Gregg proposal is a step in the right direction, but it’s not that bold a change and doesn’t really make any tough choices.  It’s a familiar pattern.

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