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Real tax reform would force both sides to do some heavy lifting

Robert Ehrlich Jr. says manipulation of the tax code has become the federal government's main public policy tool

Robert L. Ehrlich Jr.

8:00 AM EDT, March 24, 2013

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Typical daily schedule for a member of the United States Congress:

•8:30 a.m. — National Wind Energy Association: to discuss wind production tax credit.

•10 a.m. — National Association of Manufacturers: to discuss accelerated depreciation schedules and corporate income tax.

•11 a.m. — National Association of Realtors: to discuss home mortgage deduction and capital gains exclusion on home sales.

•1 p.m. — The Alliance for Charitable Reform, National Cystic Fibrosis Foundation, American Cancer Society, Muscular Dystrophy Association: to discuss enhanced funding for National Institutes of Health and federal charitable deduction.

•3 p.m. — U.S. Farmers & Ranchers Alliance: to discuss unified credit exclusion under federal estate and gift tax.

I could go on; your representatives in Congress conduct hundreds of similar meetings over the course of a year. But you get the point. The federal tax code is the primary tool used by Congress and the Executive Branch to direct public policy. The evolution of the tool in its most tangible form is a federal tax code that now runs to 76,000 pages of often arcane guidance and interpretation. And most tax preferences ("loopholes" to detractors) have highly organized and politically active constituencies.

Contrary to the typical Hollywood caricatures of Capitol Hill and K Street, however, many of the federal tax code's preferences are not the result of some nefarious plan hatched by well-heeled lobbyists in cahoots with corrupt politicians. More typically, a major preference seeks to achieve a popular policy goal. Consider, for example, the social benefits that follow from the purchase of a home, contributions to charity, saving for a college education, or discovery of new energy reserves.

It is against this daunting history of code manipulation that the great budget debate of 2013 is beginning to unfold. And in some quarters at least, the way Capitol Hill has traditionally sought to shape policy is being juxtaposed against the reality of a $16.6 trillion debt and sustained economic instability, a state of affairs that could generate enough momentum for a serious stab at fundamental tax reform — what Capitol Hill insiders call "heavy lifting." And there's nothing heavier than taking away a benefit that voters have come to expect.

The gut check(s) would be monumental: Could Republicans stomach a slimmer code that produced more revenue for the federal government to spend? Could Democrats willingly give up their favorite policy tool in the interest of tax simplification? Could enough members of both parties find the intestinal fortitude to reform heretofore sacrosanct entitlements through means testing, raising age qualifications, and higher co-pays? Would an American electorate addicted to tax preferences allow its representatives to draft a flatter, less preference-laden tax regime?

A comprehensive revamping of the tax code would require sacrifice from America's most powerful constituencies. It would also require extraordinary leadership of the type rarely seen from this president. The old adage applies: "If it was easy, everybody would be doing it." Yet we must do it.

The new year has already produced its share of minor budget showdowns. Each side can claim a political win. The "fiscal cliff" negotiation gave the president his long-promised tax increase on the wealthy, while his wildly overblown rhetoric on the consequences that would follow from an $85 billion sequester cut was met by a collective yawn from the general public and some unexpected bad press by a usually friendly media.

Each success has only encouraged the respective combatants. For the president, new revenue of $600 billion (from the expiration of the Bush tax cuts) has only whetted his appetite for additional taxes, this time from elimination of tax "loopholes" and "preferences." On the other side of the aisle, Republican fiscal hawks are encouraged by the public's seeming acceptance of a "real" budget cut for Washington, D.C.

All of which leads back to the near impossibility of a comprehensive budget deal, the recent White House "charm offensive" notwithstanding. To review, it's not about politics; it's about deeply held philosophical differences that play out every two years before the voting public. The Obama Democrats believe in higher progressive taxes and no entitlement reform. The GOP firmly opposes additional tax increases and will require significant entitlement reform (especially in light of Obamacare's two dozen new taxes and the termination of the payroll tax holiday). And both parties fear weaning the American public off its tax code dependence.

For those of you inclined to gamble, always bet the "under" on fiscal restraint and fundamental tax reform coming from Capitol Hill … you'll never lose.

Robert L. Ehrlich Jr.'s column appears Sundays. The former Maryland governor and member of Congress is a partner at the law firm King & Spalding and the author of "Turn this Car Around," a book about national politics. His email is ehrlichcolumn@gmail.com.

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