Major Tax Reform Battle Brewing, Lobbyist Says

Health care reform is done. Financial reform is on its way. What's next? Rich Gold, the head of the lobbying group at Holland and Knight, says it is only a matter of time until Washington is consumed in a major battle over tax reform. Here is a brief edited transcript of our conversation on Monday.

Whom do you represent as a lobbyist?

I work for a diverse bunch of interests. Local governments, a variety of corporate industry firms, manufacturing firms, service industry, green tech. I do a lot of climate change and budget work.

Why do you think major tax reform is inevitable?

Systemically revenues are obviously well out of balance with expenditures. With mandatory spending only getting worse, we'll have to start fundamentally looking at entitlement reform. Sixty-five percent of the budget is mandatory, 15 percent is defense, 20 percent is discretionary. You can take defense down a little bit, but we're fighting two wars. There's not money there on the discretionary side to have an impact. It's hard to know whether health care bends the cost curve up or down significantly, although I like some of the things like the review board for Medicare. But we're way overdue for something on tax policy. We're in the 1990-1991 tax deal moment, and I don't think Obama wants to go into reelection year without doing something on deficit reduction.

What items are guaranteed to be on the menu for tax reform? Tax expenditure reform? Higher standard deductions? A value-added tax?

I think you'll see corporate taxes go up first. The closing of tax loopholes (to encourage corporations from moving capital overseas) would be front and center. That would be first.

Then what?

There is only so much jimmying you can do with rates, and Obama's painted himself in a corner by saying he won't raise taxes on anybody under 250K. The real problem with all of this is that the Republicans used to be the party of limited government and now the Tea Party is making them the party of no government. To reform tax law you gotta have a dance partner.

Democrats like social engineering, so I think in climate change or elsewhere we're going to see changes to to Section 45 [the Income Tax Credit for Renewable Energy] to encourage investment in wind and solar. I think you're going to continue to see social engineering in the tax code, like sin taxes related to Americans' diet. Democrats tend to go down that road on the tax credit and new tax side.

Because you need to spread the blame for the pain or because Congress will be more balanced and it will be impossible to pass anything without bipartisan agreement?

Both things. It will be really hard for one party to take on raising revenues and making cuts without a grand compromise. The GOP is supposedly very interested in fundamental tax reform but the Tea Partiers have them in a box because they want to shrink the government so dramatically.

In the meantime, what do you see as the major sticking points in the financial regulation bill that's working its way through the Senate?

Right now consumer protection must be in chains for the GOP to agree to it. They don't want the consumer protection bureau going after the big banks. But the Democrats can't message on this and explain to the tea party folks and the rest of the America that we're are trying to deal with the folks who got the bailout, then we might as well just give up.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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