Taxmageddeon and the Tax Reform Farce

Ezra Klein tells us that Hill staffers are starting to call January 1st, 2013 “Taxmageddon” because of the legislated expiration of the Bush tax cuts, the introduction of higher Medicare taxes as part of the Affordable Care Act, and the expiration of the newly-extend payroll tax cut. One interesting wrinkle to Taxmageddon is that it will occur during a Congressional lame-duck session that could very well be in the last month of the Obama administration. This is a little strange, because things would be much simpler if the tax cuts expired a little after the new Congress took their seats, and so the winners of the 2012 elections could simply decide how to split up this giant pot of money bequeathed to them by their successors.

Anyway, very few people think that all the scheduled tax increases will go into effect, and so whoever is in power should be able to work from whatever revenue level they can and then move on from there with the rest of their proposed legislation. What this means is that everything else — major changes in spending and the tax code — should have to wait for a resolution on the revenue side. This puts into stark relief all the wrangling we saw in 2011 over the debt ceiling and spending cuts along with President Obama’s proposed tax reform — and makes it all look a bit silly.

There was always something mildly farcical about Obama going for a grand bargain on taxes and entitlement spending when, if he wins the election and then just vetoes everything that comes out of Congress, a substantial chunk of the near-and-medium term deficit will evaporate. There is something similarly goofy about the White House’s proposed corporate tax reform. It’s strange in a few ways. It combines the basic rate-lowering-and-base-broadening beloved by wonks with new preferences and tax-advantages for domestic manufacturing.

What’s producing this discordance is, I think, a recognition that this corporate tax reform framework is unlikely to be implemented before the 2012 elections, and so will have to wait for a resolution to Taxmageddon.

So, it makes more sense right now to propose some wonky reform and mix it with some stuff that will make for good soundbites on the campaign trail. If you actually wanted to reform the corporate tax code, it would make a lot more sense to do so after there was some sort of legislative consensus on what the upper bound for revenues will be for at least the next four years, and then to go after the entire tax code in a revenue-neutral fashion.

Reforming the corporate tax code on its own makes it more tempting to put in distortionary preferences for particular industries and, even more importantly, makes it tempting to do the reform with the goal of getting more revenue specifically from corporate taxes.

If you start with a revenue level that’s based on the tax rates that will go into effect on January 1, 2013, and then go after everything at once, the result will likely be cleaner and more efficient.