Committee for a Responsible Federal Budget

Finding Consensus on Tax Reform

Sep 25, 2014 | Taxes

Despite partisan differences in Washington, there's actually considerable bipartisan consensus around many elements of tax reform. That's the conclusion of a new report by the Center for American Progress (CAP). The report includes two dozen specific policies to raise $1.4 trillion of revenue over ten years that have been proposed by both Republicans and Democrats, although notably the proposals from Republicans were part of a fundamental tax reform plan that was revenue-neutral overall. Most of the consensus policies come from the President's budget and House Ways and Means Chairman Dave Camp's (R-MI) Tax Reform Act of 2014.

The report outlines a number of reductions in tax expenditures and other policies to raise revenue. On the corporate side, policies include eliminating accelerated depreciation, requiring businesses to write off half of advertising costs over ten years, eliminating last-in first-out accounting, implementing a big bank tax, and restricting earnings stripping and transfer pricing manipulation. The corporate income tax policies raise over $750 billion over ten years.

On the individual side, policies include limiting the benefit of exclusions and deductions for high earners, increasing rates on capital gains and dividends, reducing the mortgage interest deduction, and eliminating the break for "like-kind" exchanges. The report also proposed a few tax cuts through an expanded Earned Income Tax Credit (EITC); in particular, the report would extend the 2009 EITC expansions for married couples and families with three or more children and expand the credit for childless workers. On net, the individual tax policies would raise more than $550 billion, although the report suggests that the EITC expansions could be paired with some of these policies to form a revenue-neutral package.

CAP's Revenue Options

Policy Ten-Year Savings
Business Tax Proposals
Eliminate accelerated depreciation $270 billion
Require amortization of half of advertising costs $169 billion
Repeal LIFO accounting $106 billion
Enact a bank tax $48-$86* billion
Restrict earnings stripping and transfer pricing benefits $45*-$73 billion
Repeal percentage depletion $18 billion
Repeal entertainment expense deduction $15 billion
Require mark-to-market accounting for derivatives $14 billion
Modify rules for dual-capacity taxpayers $12 billion
Broaden limit on executive compensation deduction $12*-$50 billion
Other policies $8 billion
Individual Income Tax Proposals
Limit value of exclusions and deductions $498 billion
Tax capital gains and dividends as ordinary income with 40% exemption $45 billion
Reduce mortgage interest deduction limit to $500,000 $41 billion
Repeal exemption for "like-kind" exchanges $11-$41* billion
Phase out home sale capital gains exclusion for high earners $16 billion
Close "John Edwards/Newt Gingrich" loophole $15*-$25 billion
Limit carried interest loophole $3*-$17 billion
Total Revenue Raised  $1,413 billion
Total Revenue Raised After Tax Cuts  $1,329 billion

Source: Center for American Progress, using various CBO and JCT estimates
*This number is reflected in the total

At the event announcing the report, former White House economic advisor Jared Bernstein and former CBO director Doug Holtz-Eakin discussed the ideas in the report. Bernstein commended the report for including many reasonable policies that were similar between the Camp and Obama plans. In general, he said that some important pillars of tax reform should be to address the bias towards debt financing in the corporate code, the growing number of businesses organizing as pass-throughs instead of corporations, and favorable treatment of certain income, particularly non-labor income and carried interest.

Holtz-Eakin lamented the lack of discussion about tax reform compared to the amount of discussion prior to the 1986 tax reform effort. In terms of policies, he emphasized limiting the exclusion for employer-sponsored health insurance because it is a regressive and distortionary subsidy. He pushed back on the idea of a bank tax as appropriate for tax reform, saying that the policy would be at odds with the goal of making the tax code neutral across sectors.

It is important to note that while the President's budget and Camp draft have a number of policies in common, they take place in different contexts. President Obama uses revenue increases to pay for other priorities (spending increases and tax cuts) and reduce the debt. Camp uses these base-broadeners to finance rate reductions in revenue-neutral tax reform. CAP suggests that these policies could be used to pay for new spending, provide sequester relief, or serve as the foundation for tax reform. The original authors of the proposals may not agree with each option being used in a different context.

The CAP report helpfully points out a number of areas of consensus to broaden the tax base and raise revenue. Whether they are used to reduce deficits, pay for rate reductions, or other priorities, these policies have a potential place in a bipartisan comprehensive tax reform plan.