Taxes, Philosophy and Reform: Two Conversations With Milken Institute Review Authors

Session Overview: Milken Institute Review Panel on Tax Reform and Reform Conservatism

The session featured two distinct presentations focusing on the feasibility of US tax reform and the evolution of conservative political strategy. Len Berman, Director of the Urban-Brookings Tax Policy Center, analyzed historical precedents and structural barriers to taxation, while Reihan Salam, Executive Editor of National Review, outlined "reform conservatism" as a pragmatic, decentralized approach to policy.

Part 1: Tax Reform & Corporate Taxation (Len Berman)

• 1986 Tax Reform Precedents:
  • The Tax Reform Act of 1986 was facilitated by a public perception that the tax code was "irredeemably broken," specifically following the 1981 tax act which created excessive loopholes (e.g., "see-through" office buildings in Houston).
  • Bipartisanship was achievable due to a lack of cynicism; President Reagan and Democratic Leader Tip O'Neill maintained personal relationships despite policy differences.
  • The 1986 Act was revenue-neutral but included a $100 billion increase in corporate taxes used to cut individual income tax rates significantly.
  • A pivotal moment involved corporate CEOs supporting higher corporate taxes because their personal income tax rates were slashed by nearly half, diverging from the economic reality that corporate taxes ultimately burden investors or workers.
• Current Barriers to Reform:
  • Today, the tax system is viewed as inefficient and unfair, but not "broken" enough to trigger the necessary political crisis for reform.
  • Modern political polarization prevents the "rational" framing required for reform, as opponents can easily demagogue any plan that raises taxes on specific groups.
  • Lack of bipartisan relationship-building is attributed to the decline of in-person interaction (e.g., jet travel allowing members to leave Washington on weekends), fostering an environment of mutual dislike.
• Corporate Tax Structure & Globalization:
  • The corporate income tax is defended largely as a political compromise to tax "rich companies" rather than individuals, though it creates double taxation on dividends and capital gains.
  • The ideal economic solution is "corporate tax integration" (taxing income only once), a model used in New Zealand and Australia via dividend tax credits, but it lacks political support.
  • Current rules incentivize keeping foreign profits offshore (e.g., GE holding hundreds of millions in low-tax jurisdictions) rather than repatriating them.
  • The "Cayman Islands" phenomenon highlights economic activity booked as offshore without physical presence, distorting investment decisions.
  • Evidence suggests tax policy significantly impacts "tax-sheltering" behavior and corporate location decisions, though its effect on overall labor supply and savings rates is "relatively modest."
• Proposed Solutions:
  • Revenue-Neutral Reform: Berman suggests a potential coalition around closing loopholes on foreign income while cutting domestic rates.
  • Territorial vs. Worldwide Taxation: Moving to a territorial system (exempting foreign income) could permanently incentivize moving economic activity abroad; a worldwide system allows for rate cuts but faces political resistance.
  • Value-Added Tax (VAT): Berman proposes a VAT to fund revenue-neutral rate cuts, noting it is efficient and supports growth by not taxing savings.
    • Despite broad international use, a VAT faces political hurdles due to its regressive nature (disliked by liberals) and potential to expand government (disliked by conservatives like Grover Norquist, who calls it "French for big government").
    • Historical precedent suggests "never say never," citing the reversal of the 1982 Social Security tax non-taxation pledge.
• Estate vs. Inheritance Tax:
  • Berman recommends replacing the estate tax (levied on the decedent's estate, threshold ~$11 million) with an inheritance tax (levied on heirs).
  • An inheritance tax addresses the accumulation of dynastic wealth while allowing families to avoid taxation by distributing assets among many heirs.
  • This shift reframes the policy from a "grim reaper" tax on the grieving to a tax on large windfalls, potentially increasing political viability.

Part 2: Reform Conservatism (Reihan Salam)

• Core Philosophy:
  • Applied Conservatism: Distinguishes itself from "abstraction conservatism" by moving beyond simply opposing government solutions to proactively designing decentralized, market-based alternatives that work in specific contexts.
  • Mediating Institutions: Prioritizes empowering local institutions to solve problems via trial and error rather than centralized "one-size-fits-all" mandates from experts.
  • Coalition Building: Critiques the right's tendency toward ideological purity (e.g., abolishing the Department of Education) rather than pragmatic compromise, arguing that building coalitions requires accepting "half a loaf" to achieve long-term goals.
• Healthcare Policy:
  • Coburn Plan: Highlights Tom Coburn's proposal to replace Obamacare with state-regulated, subsidized insurance markets using refundable tax credits, aiming to reform the broader system (Medicare/Medicaid) rather than just the ACA.
  • Financing: Suggests competing bids for Medicare benefits (defined contribution) or pilot programs for accountable care organizations to drive costs down.
  • Tax Equity: Supports eliminating the tax deductibility of employer-sponsored health insurance premiums to correct regressive subsidies favoring high-income earners (a principle embraced by Coburn, Rubio, and McCain).
• Globalization & Labor:
  • Global Division of Labor: Views globalization not merely as trade volume but as a complex new global division of labor; the US must position itself based on workforce skills, regulation, and corporate tax codes.
  • Addressing Losers: Acknowledges that globalization creates losers but argues against protecting specific industries via tariffs; instead, advocates for robust redistribution and retraining to maintain political support for open markets.
  • Immigration Policy: Proposes a skills-based immigration policy to mitigate long-term workforce challenges for lower-skilled domestic workers, recognizing the multi-generational impact of current immigration trends.
• Subsidiarity & Federalism:
  • Local Solutions: Advocates for "subsidiarity," pushing decisions on education, minimum wages, and Medicaid to state levels to accommodate local economic conditions (e.g., minimum wage should be $13 in SF vs. $8 in Mississippi).
  • Federal Intervention: Limits federal intervention to areas requiring national uniformity, such as civil rights, while opposing federal strings attached to state programs (e.g., Medicaid grants) that stifle innovation.
• Family & Tax Policy:
  • Policy Shift: Urges conservatives to move beyond top-line tax rate cuts to focus on family-stabilizing provisions like the Child Tax Credit and Earned Income Tax Credit (EITC).
  • Demographics: Notes that 45% of Republicans support raising taxes on the wealthy, suggesting a disconnect between polling and policy priorities.
  • Goal: Aims to create "propitious conditions" for family formation rather than attempting to engineer cultural change through legislation alone.