Senate Minority Leader Mitch McConnell has it backward. A discussion on more tax revenue should not be "finished" with last week's partial expiration of the Bush era income tax cuts. The broader conversation about reducing the deficit and reforming the tax code should be just beginning, and it has to include more revenue as well as spending cuts and entitlement reform.
McConnell, R-Ky., appeared Sunday on morning news talk shows to flatly reject the idea that additional tax revenues may be raised in any future deficit-cutting deal. That's too bad. He was helpful in working with the Obama administration to avoid the fiscal cliff. But comprehensive tax reform is still needed and ending some tax expenditures — those tax deductions, credits and exemptions that starve the federal Treasury of an estimated $1.1 trillion annually — should be part of it. Some other key Republicans have been open to this reasonable approach, and McConnell should not rule it out of bounds.
McConnell worked with Vice President Joe Biden to prevent automatic increases on marginal tax rates for all but the top 1 percent of households. But that foray into productive bipartisanship was short-lived. On the ABC News program This Week, McConnell bluntly declared that he was done talking about taxes. It's "Over. Completed. That's behind us," McConnell pronounced, saying that the focus needs to be on spending cuts. The only changes in the tax code he would accept would have to be "revenue neutral," meaning that closing tax expenditures is balanced by lower marginal tax rates. This rigid stance would complicate the coming negotiations on raising the debt ceiling and any hope of a "grand bargain" on federal revenue and spending.
Today, tax revenue is only 15.7 percent of GDP, nearly the lowest in 60 years. The fiscal cliff deal adjusted marginal rates upward from 36 percent to 39.6 percent for individuals making more than $400,000 and couples making more than $450,000 a year, to more fairly reflect the disproportionate benefits the country's wealthiest families have received from the economy. The changes mean about $620 billion in new revenues will be brought in over 10 years. That was a first step, but it was a relatively modest one.
Now Republicans and Democrats in Congress need to address the tax code that rewards special interests and gives wealthy people and big businesses too many opportunities to avoid taxes. For instance, the "carried interest" tax loophole should be closed. It allows hedge fund managers to claim their millions of dollars in annual earnings as capital gains, which are taxed at a much lower rate — only 20 percent under the new deal, up from just 15 percent. And special focus should be paid to closing loopholes that corporations use to avoid their tax liability. Corporate profits are at record highs, yet as a share of tax revenues, corporate taxes are near record lows.
The federal tax code has not been overhauled since 1986, when Ronald Reagan was president, and has once again become impenetrably complex and riddled with loopholes. Any deficit-cutting deal must include fixing the tax code and bringing in the resulting revenue that should have been funding the government all along.