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Tax Reform: Still Not Happening

Ramesh Ponnuru is a Bloomberg View columnist. He is a senior editor of National Review and the author of “The Party of Death: The Democrats, the Media, the Courts, and the Disregard for Human Life.”
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Tax reformers' hope springs eternal, but don't bet on a big tax deal in 2015 or 2016. Don't bet on a medium-sized one either.

The parties are too far apart to enact a sweeping reform of the U.S. tax code that includes the personal-income tax. Most Republicans want fewer tax breaks, lower rates and especially a lower top rate, and they don't want the total tax burden to rise. Democrats want fewer tax breaks, too, but they count different provisions as "breaks." And they want to increase revenue.

Maybe those differences could be bridged, though it would be extremely hard. But there's a bigger problem: The Republican insistence on lower rates is impossible to reconcile with the Democratic concern that the top 1 percent of earners has too much money, too much power and too much influence over the government.

It might be possible to lower rates and scale back tax breaks in a way that increases the top 10 percent's share of the tax burden. But there's no way to do so without shrinking the burden for the top 1 percent. The benefit of a lower rate for them will always be bigger than the benefit of tax breaks. That means that a lower top rate is going to be off limits for Democrats. But for Republicans, lowering that rate is the main point of getting rid of tax breaks. No deal.

OK, then, what about corporate tax reform? Most Republicans and Democrats agree that the corporate tax rate should be lowered and tax breaks for companies should be scaled back, right? In theory, yes. Here, though, the difference between the parties on what counts as an unjustified tax break are an obstacle to a deal. Many Democrats want to make companies write off the cost of investments over a longer time frame than they do today. A reform that does so would increase the tax burden on new investments by corporations, which makes it on balance a step backward from Republicans' point of view.

Assume, though, that congressional dealmakers could find a way around that issue. The probably insuperable problem that's left is that small businesses mostly pay taxes under the individual rather than the corporate tax code. Those small businesses saw their tax rates go up in 2013. That creates a political problem for corporate tax reform: It seems unlikely that Congress would now cut rates for big businesses while offering no relief for most small businesses. 

Ending this impasse would require a new approach, as Representative Devin Nunes, a California Republican, has been urging for some time. He thinks that all businesses, however organized, should be able to write off the cost of an investment in the year the cost is incurred. He would make up for the lost revenue by ending tax breaks for companies' borrowing. But that's still a minority position in Congress.

A broader reform of the income tax, meanwhile, will require one of two things to happen. Either one of the parties needs to back away from some of its commitments, or one of them needs to gain unified control of the government and then make its version of reform a priority.

Be prepared to wait a while.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Ramesh Ponnuru at rponnuru@bloomberg.net

To contact the editor on this story:
Timothy Lavin at tlavin1@bloomberg.net