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Obama Can Be Like Reagan With Tax Reform

If President Barack Obama is looking for ways to create jobs and work with Republicans, there’s a project readily at hand for him: tax reform.

By eliminating tax loopholes and lowering tax rates, Obama can tread in the footsteps of no less a GOP hero than President Ronald Reagan, who worked with Democrats to reform the tax system in 1986.

In fact, next year is the 25th anniversary of that bipartisan achievement, the work of Reagan, the late Reps. Jack Kemp (R-N.Y.) and Dan Rostenkowski (D-Ill.), former Rep. Dick Gephardt (D-Mo.) and former Sens. Bill Bradley (D-N.J.), Bob Kasten (R-Wis.) and Bob Packwood (R-Ore.).

That project — along with the lowering of marginal tax rates in 1981 by Reagan and Congress (originally, Kemp’s idea) — led to a boom era in the 1980s that created 16 million jobs.

Obama could easily adopt (or adapt) one of three bipartisan tax reform proposals already in play.

The latest, unveiled Wednesday by a panel headed by former White House budget director Alice Rivlin and former Sen. Pete Domenici (R-N.M.) would establish just two income tax rates, 15 percent and 27 percent, down from the present top rate of 35 percent (or 39.6 percent, if President George W. Bush’s tax cuts expire).

The corporate tax rate would fall from 35 percent to 27 percent in return for closing most business loopholes.

More controversially, the plan would create a new 6.5 percent national sales tax to reduce deficits.

Last week, the two heads of Obama’s national debt commission, former Sen. Alan Simpson (R-Wyo.) and former White House Chief of Staff Erskine Bowles, proposed eliminating all $1 trillion in “tax expenditures” to reduce individual rates to 8 percent, 14 percent and 23 percent and cut the corporate rate to 26 percent.

A third plan, the only one in actual legislative form, was introduced in March by Sens. Ron Wyden (D-Ore.) and Judd Gregg (R-N.H.).

It was Wyden who suggested to me the benefits of tax reform to the beleaguered Obama.

“One, it’s a job creator in the here and now, not light years in the future,” he said. “Two, it’s a unifier, bringing together labor and management. And, third, it gets beyond thoroughly partisan politics.

“Instead of Democrats and Republicans beating up on each other,” Wyden said, “the real challenge is to take on the interest groups who have hijacked the tax code” since 1986, he said.

The Wyden-Gregg proposal has been estimated by the conservative Heritage Foundation as potentially creating 2.3 million new jobs a year, increasing disposable income for average families by $4,000 and boosting gross domestic product by $300 billion (or 2 percent) a year.

The measure also has been positively reviewed by the Manufacturers Alliance, the centrist Tax Policy Center and the liberal Center for American Progress and Citizens for Tax Justice.

Although it’s designed to be revenue-neutral, Heritage and others back up Wyden’s claim that its supply-side growth effects would actually raise government revenue and help lower deficits.

The measure would establish three individual income tax rates instead of the present six — 15 percent, 25 percent and 35 percent — and lower the corporate rate from 35 percent (second-highest in the world) to 24 percent.

It would triple the standard deduction, retain the popular mortgage interest deduction and child and earned income tax credits and permanently eliminate the alternative minimum tax.

Simpson and Bowles included Wyden-Gregg as one tax reform option in their sweeping plan to reduce the federal deficit by $4 trillion through 2020 and hold the federal debt at 60 percent of GDP in 2024, rather than the 100 percent that it will hit under current policy.

The overall plan was attacked by liberals because it extended the Social Security retirement age to 69 (in 2075) and emphasizes spending cuts over revenue increases, but it was praised by budget hawks such as Maya MacGuineas of the Committee for a Responsible Federal Budget.

“It’s a huge, bold plan,” she said, “that changes the discussion forever, as far as I’m concerned. There’s no going back to the nonsense we’ve had before, where the president submits a budget that’s a joke and all we do all year long is come up with policies that add to the deficit.”

She especially praised Simpson and Bowles for demonstrating how rates would rise if various popular tax breaks were retained — up to 13 percent, 21 percent and 28 percent.

One of the key aims of all three plans is, as Simpson and Bowles put it, “to make America the best place in the world to start and grow a business.”

That, in the long run, is the only path to sustained economic recovery, not government stimuli and subsidies.

Another goal has to be political feasibility. Wyden said he and Gregg sought to satisfy both labor and management by ending the subsidy for shipping jobs overseas and lowering the corporate rate to a level that would encourage U.S. businesses to return their foreign profits to this country.

The plan, he said, also replaces “this insanely complicated, job-killing, thoroughly discredited tax system that is not serving America as we try to compete in tough global markets.”

On the Senate floor Tuesday, Wyden said that instead of fighting about the tax policies of Bush and Obama — both of which retain a system in which “the taxpayer loses” — Obama and Congress ought to find a better way, as Reagan and Rostenkowski did 25 years ago.

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