Lori Montgomery’s story on yesterday’s tax extenders vote in the Senate Finance Committee is kind of aggressively stupid, the kind of story that uses funny-sounding tax breaks as the basis for an anti-Congress pose. In reality those funny-sounding tax breaks amount to a rounding error in the overall budget. Most of the tax extender package, $92 billion out of the $143 billion, comes from a one-year patch to the alternative minimum tax, something Congress botched when they put it into place by failing to index it properly. As a result it would hit too many taxpayers of more modest means when it was designed to force the rich into paying some tax rather than deducting everything away. This has become an annual ritual in Washington to patch the AMT. If you want to get on their case about something, that’s it, because the one-year fixes get more and more expensive, and a comprehensive overhaul would be cheaper in the long run. But the rum-tax rebate and the tax credit for NASCAR owners isn’t really relevant to the larger tax debate. They just sound funny.
However, they do illustrate a point about the now-familiar idea that we can lower tax rates and “broaden the base” by closing loopholes, and everything will be hunky-dory. Montgomery obviously believes this, that’s why she’s written a piece that looks down upon Senators who fail to close those loopholes. But this is the nature of the business. One man’s loophole is another constituent’s hard-won credit, and that person has someone in Washington lobbying on their behalf to keep that credit intact. Tax reform will never happen in a vacuum where everyone with a tax credit will suddenly agree to forego their goodies for the good of the country. Even if their tax credit slips away, ultimately tax expenditures are what politicians give out in favors to win support. And that favor factory won’t shut down. The end result of a “lower the rates, broaden the base” tax regime is that the base will get narrower over time, as the loopholes return. But we’ll be stuck with the lower rates, far too low to fund initiatives in the government. (I’m aware of the MMT theory that taxes don’t fund spending, but on a political level, for the moment they do, and if you have less of a base to draw from, you can forget about any new programs. I’m sorry the world works that way, but it does. In addition, higher taxes on the rich and corporations serve an important function on a political economy level.)
The Finance Committee did scale back the tax extenders package, incidentally. About 20 tax breaks typically extended were excised. And all the fiscal scolds went home generally unhappy that they couldn’t do more. But the real problem would come if “tax reform” actually moved forward, and we gave big tax cuts to corporations for minor delays in the favors and goodies heaped on them habitually.
By the way, as far as I know, the Finance Committee package did include the principal reduction tax exclusion. This is the softer of two parallel bills to protect underwater homeowners and foreclosure victims from getting hit with a tax bill. This does not mean that the House will comply, and the House has always been the problem for this measure.