Tax Reform: Hope and Frustration

The relative honesty is refreshing. Washington and its media enablers, though promising to give due attention to urgently needed tax reform, admit that progress will wait until at least 2017. That timing constitutes a significant change. Every January for several years how, this gang has promised tax reform in the coming year. They have always disappointed. The last significant change in the code occurred thirty years ago in 1986 under President Ronald Reagan. Perhaps this new sobriety is a good sign that maybe those responsible are getting serious.

Certainly reason for hope exists. All — Democrat and Republican, left-leaning and right — agree that the present code, both its corporate and its individual parts, is counter-productive, cumbersome, impenetrably complex, inequitable, and growth retarding. Even more significant, all, whether they lean left and prioritize equity or lean right and prioritize growth, which is just about everyone in Washington, see the remedy in broadening the base, largely by ridding the code of its layers of tax breaks, and reducing statutory rates. And indeed, past efforts have rallied bipartisan support along those lines, a rare thing in today’s highly combative political milieu. Efforts have failed because leadership, either in the White House or Congress, could not or would not muster the will to compromise over what were details. Nonetheless, a fundamental agreement has long been evident.

Take the code’s debilitating complexity, some 70,000 opaque pages of it, in fact. Those who stress equity decry this state of affairs, because it allows moneyed interests to hire accountants, lawyers, and lobbyists to help them shelter income and so pay lower rates than middle class and low-income people who cannot secure such resources. Those who stress growth note how the complexity prompts businesses and individuals to expend money, time, and effort on tax planning and preparation that would better serve the economy if it were directed toward production efficiencies, technological advances, and training, in other words activities that increase output, employment, income, and wealth. Each side comes at this issue from very different biases and perspectives, to be sure, but nonetheless agrees heartily that the complexity must go.

Each side identifies tax breaks as integral of the problem. Those who stress equity can see privilege at every level. When the corporate code offers allowances for oil depletion, research, and other specialized industries, they see billion dollar corporations avoiding tax obligations while other, smaller businesses pay at a statutory rate, which, because of all the breaks, is set at the internationally high level of 35 percent. They see parallel inequalities in the individual code. Mortgage interest and charitable deductions, though theoretically open to all, benefit the rich disproportionately, for they get bigger tax breaks for the larger mortgages they have on their more lavish homes and also for the greater gifts they give their favored causes. The less affluent get comparably smaller breaks or none at all if they rent and give in amounts beneath the Internal Revenue Service’s notice. It clearly serves equity to rid the code of such breaks or cap them, allowing lower statutory rates that would benefit taxpayers more uniformly.

Those who set a higher priority on growth reach the same conclusion from their very different starting place. They decry the breaks for distorting of free markets, which they see with justice as the most effective servant of growth. Because of the breaks, investment dollars and economic effort flow toward industries to which political favor has given tax advantages instead of toward those that would better serve fundamental economic needs. Similarly, they see the mortgage interest deduction in the individual code as another means to distort critical market signals, pulling assets toward bigger real estate investments and in the process short changing other investments that might promote economic growth and jobs creation more effectively than by building mansions and vacation homes.

Because such a wide spectrum of ideological bias can see their admittedly very different priorities served by similar reforms, almost all proposals for change, wherever they have originated, have had these same general outlines. They have all sought to eliminate or cap targeted tax breaks and reduce statutory rates. Back in 2013, President Obama’s Bowles-Simpson commission to look into tax reform recommended moves exactly along these lines. More than once, President Obama himself has proposed such changes in the corporate code. From the Republican side, Representative David Camp, when he headed the House Ways and Means Committee, proposed similar reforms, as has did his successor, Representative Paul Ryan. Only details and degrees differed. Without White House leadership in making compromises, however, fundamentally minor differences have killed each past reform effort, a particularly frustrating record given so much agreement in principle.

Now, hopes for reform have arisen anew. As before, today’s optimism stems from the recognition of common ground on basic principles. It gains from a new, favorable political configuration. Reformer Paul Ryan has risen to the powerful position of Speaker of the House. He has left the Ways and Means Committee to another avid reform advocate, Kevin Brady. Because Ryan is new in his position and 2016 is an election year, few can offer much hope before 2017. Still even with such support, any hope for a more equitable, growth-friendly code still depends on the new president. It is less a question of Democrat or Republican. Both sides, after all, broadly agree on what must be done. It is rather a question of whether that individual has the will to create a bridge for the smaller compromises. If he or she is up to the task, tax reform in 2017 looks likely. Otherwise the pattern of the past three decades will repeat.




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