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Is Tax Reform Even Possible?

David Callahan

It seems like everyone agrees that reforming the tax system is a good idea. Progressives don't like how today's Swiss cheese tax code mainly helps the affluent, while conservatives don't like how our tax system picks winners and losers. Typical filers complain about the complexity of taxes -- indeed this is a bigger gripe among Americans than how much they pay. 

I have written often that tax reform would be a good challenge for President Obama to tackle, because it would allow him to both battle entrenched interests and also get something done in Washington, given the bipartisan and public support for streamlining the tax code. 

Governor Romney, meanwhile, has made tax reform central to his economic plan, saying that he would pay for a reduction in tax rates by closing loopholes. But he doesn't provide many specifics as to which loopholes. 

It's no surprise that Romney is mum on this most important of details. Tax reform is minefield. And given the immense influence of special interests, serious tax reform -- of the kind we saw in 1986 -- may simply not be possible. 

One way to gauge the scope of this challenge is to consider how much financial and lobbying muscle is now arrayed behind the most costly tax breaks

Let's start with the biggest perk of them all: Exclusion of costs for employer provided health insurance, which will total $164 billion in FY 2014, according to the Congressional Research Service. This break is a huge subsidy for the health insurance industry, as well as the healthcare sector as a whole. And, like other big breaks, it disproportionately benefits better off Americans -- as you might imagine, since many low-income workers don't get health insurance from their employers. 

Put aside for a moment the matter of how downsizing this tax break might affect policy, including Obamacare, and just consider the political feasibility of such a task. Over the past two years, the health sector has donated $147 million to members of Congress or candidates, more than nearly other industry, including oil and energy companies. And that spending pales in comparison to its outlays for lobbying. In 2011, the health sector spent $508 million on lobbying -- more than any other interest group. The health sector spent twice as much money lobbying as the defense and agriculture sectors put together. 

We saw how hard it was for President Obama to take on this sector, even though a big part of what he wanted to do was provide more subsidized customers to health insurers. Seriously restructuring or reducing tax subsidies for healthcare could prove an even heavier lift. 

The next biggest tax break is the exclusion for retirement savings, mainly 401(k)s, and will total $162 billion in 2014. Going after this break would throw lawmakers up against another leading biggest political force in national politics -- Wall Street. In 2010, securities and investment firms were second only to the health sector in their contributions to members of Congress. Statistically, they rank behind many other sectors in their spending on lobbying, but we need only look at their fight against Dodd-Frank -- both to stop it and now to kill it -- to appreciate the power of this industry. They won't take lightly to any reduction in the massive tax subsidy for their 401(k) clients -- clients who generate fat and often unwarranted fees (as Demos research has shown) for Wall Street firms. 

Moving right along, the third biggest tax break is for the mortgage interest deduction -- which will total $99.8 billion in FY 2014. This is also phenomenally well defended. (And also mainly benefits better off Americans.)

In 2011, the National Association of Realtors was the third biggest spender on lobbying in Washington. Who knew? Both presidential candidates, apparently, since Romney has specifically said he'd mostly spare this tax break while President Obama went out of his way to declare his support of the deduction in his convention speech. Of course, it's not just realtors and mortgage brokers who will fight to the death for this tax break. It's the construction industry, another major campaign donor and lobbying force. 

I could continue down the list of tax breaks, but I think the point is clear: Outlays of money in politics tend to correlate closely with outlays of tax dollars. Nearly anywhere there are big subsidies, there are big interests arrayed behind those subsidies. 

Oh, and did I mention that many of these tax breaks are very popular with the voters -- particularly the affluent ones who turn out most reliably? There is that, too. 

Will Washington attempt some kind of tax reform next year? Probably. But clearly it has its priorities wrong: its first order of business should be take on campaign finance reform.