The voices of Tax Policy Center's researchers and staff
After President Obama proposed, and rapidly abandoned, a plan to curb the tax advantages of Sec. 529 college savings accounts, several wise observers, including my friend David Wessel at Brookings, saw an object lesson for broad-based tax reform. To wit: If lawmakers can’t ditch a single $1 billion tax break, how could they possibly agree to a full-blown rewrite that would eliminate scores of far more popular subsidies in return for lower tax rates?
Actually, they could. The experience of the 1986 Tax Reform and, in a different way, of the immortal ever-expiring tax provisions dubbed The Extenders shows us how.
Picking off tax subsidies one-at-a-time is a fool’s game. But paradoxically, killing scores of tax breaks at once, either directly or by capping their value across-the-board, may be easier—especially if they are dumped in exchange for a tangible, easily understood benefit such as lowering tax rates. Politicians from Barack Obama to Mitt Romney have suggested such caps. So has economist Martin Feldstein. My Tax Policy Center colleagues Bob Williams, Eric Toder, Joe Rosenberg, and Dan Baneman explored several of these options back in 2012.
We saw one form of this strategy work in 1986. Tax reformers, starting with President Reagan, began the exercise by setting specific rate targets and agreeing that reform would have to raise as much money as the old tax law. Then, they proposed wiping out vast acres of tax breaks to achieve those goals.
Lobbyists who wanted to save their favored tax breaks had only two options. They could try to kill someone's favorite tax break to save their own. Or they had to convince lawmakers to raise rates above those initial targets. If keeping a tax subsidy could be specifically linked to, say, a one percentage point increase in rates, advocates would have to defend that higher rate. In a very transparent way, tens of millions of taxpayers could see their rates rise to protect some special interest.
And it worked. In the end, Congress substantially lowered rates even as it eliminated many, if not all, subsidies.
The extenders story sends the same message, but from a negative experience. Each time these subsidies are up for renewal, lobbyists, like endangered musk-oxen, form a tight circle to protect one another. As long as they stay together, it is impossible for lawmakers to pick off any single subsidy, no matter how weak on the merits. And it is easy for them to stick together as long as voters see no explicit benefit to dumping any one tax expenditure.
Voters need to understand, in the most transparent way, that there is a price for preserving junk subsidies. They need to see “what’s in it for me.”
Sadly, deficit reduction—the payoff for killing the extenders-- is not a popular reward. Rate cuts, on the other hand, may be more enticing.
That brings us back to Obama’s aborted attempt to curb 529s. There was a trade-off. Taken together, all Obama’s education reforms would have helped most families. But they never knew it. How could they? In his haste to retreat, Obama made no effort to explain it.
That too would not happen if a president fully engaged in big tax reform.
Let me be clear: Tax reform isn’t going to happen any time soon, for lots of reasons. And David and others are right to say that the demise of Obama’s plan to cut 529s reflects the lack of serious interest in reform by most lawmakers today. But the survival of these education subsidies does not mean that a rate-cuts-for-base-broadening swap will never be possible. It may mean that lawmakers need to be even more aggressive when it comes to killing off special interest tax breaks.
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