The ‘Buffett rule’ and the difficult path to tax reform

Both Republicans and Democrats in Washington have called for simplifying the tax code, broadening the tax base and lowering at least some marginal tax rates. But MIT economist and author Simon Johnson said there’s a significant hurdle in the way of any such reform -- a hurdle highlighted by the Senate vote Monday on the Obama administration’s proposed “Buffett rule.”

The proposal, which would impose a 30% minimum tax on anyone with $2 million or more in taxable income, was blocked in the Senate. Although 50 Democrats and one Republican (Susan Collins of Maine) voted to end debate on the motion and bring the bill to a vote, that was nine votes less than the 60 needed to end a filibuster.

In an interview, Johnson said the incident “gets to the heart of the ‘taxpayer protection pledge,’” the promise not to raise taxes that the overwhelming majority of Republicans in Congress have signed. The Buffett rule would raise a “trivial” amount of money, Johnson argued -- the congressional Joint Committee on Taxation estimated that the 10-year total would be just under $47 billion, which is the Washington equivalent of a tip jar -- and yet “Republicans won’t budge on it.”

As The Times’ editorial board argued last week, the Buffett rule isn’t really tax reform. It’s a shortcut that circumvents a much tougher debate over the preferences, credits, deductions and other breaks that riddle the tax code, undermining efficiency, compliance and progressivity.
Doing real tax simplification would require Congress to thin the thicket of those “tax expenditures,” broadening the tax base and potentially enabling Washington to raise more money at lower rates. But Johnson noted that in any such debate, “there have to be losers, and the losers will fight.” Losers in this case would be those who’ve been paying less taxes because some of their income has come from or was invested in activities favored by Congress, such as borrowing money to buy a home or socking away dollars for retirement.

The support in Congress for these sorts of activities is understandable. Some, like home ownership, are precious close to motherhood and apple pie. The question for policymakers, however, is whether the subsidies are necessary, effective and affordable, given the country’s budget problems.

Whether we even get to those questions depends on lawmakers’ willingness to consider measures that run counter to the “taxpayer protection pledge” by Grover Norquist’s Americans for Tax Reform group. The pledge classifies any proposal to reduce a deduction or credit as a tax increase unless it’s fully offset by a reduction in tax rates.

Johnson isn’t sanguine on that front. And Republicans aren’t the only party standing in the way of better tax policy, he argues. “Democrats have become a party of tax cuts too,” he said.

He offers his analysis of Washington’s fiscal problems in a new book co-written with James Kwak, “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.” Although he’s not a pure deficit hawk, Johnson is concerned enough about the fiscal situation in Washington to support steps that some might consider extreme. For example, he favors letting all the George W. Bush administration tax cuts expire, including those on working- and middle-class earners, although he would keep a partial payroll-tax holiday in place until the unemployment situation improved.

The point, he said, is to curb the federal government’s appetite for debt gradually, so it won’t have to take drastic steps later. “I really don’t think this country will be brought down by an external threat,” or by competition from other countries with fast-growing economies, Johnson said. “The issue is, what do we do to ourselves?”

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