If there's one major issue on which everyone in Washington seems to believe the White House and congressional Republicans might be able to agree to do something ambitious in the next two years, it's tax reform. A significant overhaul of the tax code hasn't happened in many years, and there are some areas of agreement between the two sides. Republicans supposedly want to show they can govern as the party in control of Congress, and President Barack Obama would like to obtain at least one significant legislative achievement in his second term. Big business, which has the ear of both parties, is eager for it. So is it going to happen?
The answer depends, it would seem, on the tender emotions of Republicans, who are already complaining that tax reform might have to be scrapped if Obama is mean to them. While the president seems capable of fighting his opposition on one issue and negotiating with them on another, so far Republicans are acting like some moody toddler, ready to start bawling and breaking toys at the first hint of frustration. One report after another from Capitol Hill (see here for an example) shows Republican legislators complaining that although they really want to undertake tax reform, it'll be impossible if Obama takes executive action on immigration, because that would hurt their feelings so. "He's so mean!" is going to become an all-purpose excuse for Republican inaction, on tax reform and everything else.
If they're sincere about their desire for tax reform, what's to stop Republicans from—and see if you can follow me here—writing a tax reform bill? They don't actually need the White House's help to do that. In fact, earlier this year Representative Dave Camp, chair of the House Ways and Means Committee, put out a comprehensive reform plan full of tough choices and potentially unpopular provisions. Republicans promptly distanced themselves from it, Camp declined to run for re-election, and the plan died.
But there are other proposals floating around, vague though most may be. Republicans could take them and use them as a starting point. It's true that many of the things they'd want out of tax reform are things President Obama would object to, just as there are things he'd want that they wouldn't. Eventually, there will have to be negotiations and compromise if there's going to be a bill. But nothing's stopping Republicans from getting the process rolling.
Until they do, one has to question just how committed they are to it. The truth is that if tax reform happens, it's going to be a long, involved process; indeed, it's one of the most challenging legislative undertakings there is. That's not only because the tax code is so complex to begin with and there are potentially thousands of decisions to be made, but because there are so many powerful interests who will be working very hard and spending lots of money to shape reform to their advantage. It's one thing to put out a press release saying we should close loopholes; it's quite another to actually decide which loopholes are going to be closed.
Republicans haven't had a lot of practice in complex legislating over the last six years. So do they want tax reform enough to do the work involved? To resolve differences within their party? To withstand the tidal wave of lobbying? To negotiate with a White House they despise? Perhaps I'm not giving them enough credit, but my guess is that the answer is that they don't want it quite that much. It's a heck of a lot easier to just hold the occasional press conference condemning the president for being a big meanie, and call it a day.
There is, however, at least some agreement on what reform would entail, particularly reform of the corporate code. It would have to have two parts. The first is to bring down the corporate income tax rate, which currently stands at 35 percent, among the highest in the world. Even Democrats are open to bringing down that rate, depending on how the second part of reform—simplifying the code and removing loopholes—proceeds. If you did the first without doing the second, the reform would balloon the deficit, and that won't fly. Democrats would like reform to result in a net increase in revenue, which could then be used for other things; Republicans will fight to keep it revenue-neutral. But even revenue-neutral is going to be tough, because every loophole has defenders, many of them very powerful, who will say, "Sure, let's get rid of loopholes, just not our loophole."
Republicans are particularly vocal about the absurd complexity of the tax code, but we have to understand how it got so complicated in the first place. Think about it this way: You want to know why General Electric, one of the largest corporations in America, pays almost no taxes? Why, for instance, in 2010 the company made over $4 billion in domestic profits and not only paid no federal taxes, it actually got a rebate, from you and me, to the tune of $3.3 billion? It's because, to simplify things a bit, they're the ones who wrote the tax code, they and corporations like them with the help of members of Congress. The biggest corporations employ an army of lobbyists whose job it is to maintain the tax breaks from which they benefit so handsomely and create new ones they can exploit; and another army of accountants and tax lawyers, whose job it is to squeeze every last nickel out of their tax bill.
Now, do you think General Electric is eager for tax reform? Hardly. The system is working great for them. Cry all you want about that 35 percent top rate, but to big corporations, it's a joke. G.E. is hardly alone; many of the country's largest and best-known companies have had years where they made billions in profits and got tax rebates.
The real challenge of tax reform will be to reengineer the system in a way that maximizes opportunities for growth while not starving the government of revenue—and to do it in a way that makes the winners of the reform the American public, as opposed to ExxonMobil or Goldman Sachs. And while there will certainly be lots of provisions to argue over, there are some substantive areas of agreement; for instance, many Republicans favor expanding the Earned Income Tax Credit, which Democrats would support enthusiastically.
To be clear, Democrats may also be reluctant to face some of the tricky choices tax reform would entail. But Republicans are in charge in Congress now, and if reform is to happen, they'll have to get over their hurt feelings and visceral hatred of Barack Obama—over immigration or anything else—and actually do the work and negotiation necessary, over a period of months or even years, to accomplish a goal they say they desperately want. I can't imagine they're capable of it. But maybe they'll surprise us all.