No Real Tax Reform Plan Now and Probably Never

Right From the Start

Last week Speaker of the House Paul Ryan (R-WI) announced that the House would take up consideration of the repeal of the Affordable Care Act (Obamacare) and its replacement right after the latest Congressional recess.  He also noted that once that is done they will take up consideration of tax reform, probably in the latter part of the summer.  I was stunned.

There are 435 members of the House of Representatives.  The Republicans control the House with 239 members.  Two hundred and thirty-nine Republicans and they can only consider one thing at a time?  Look, I get that the 193 Democrats in the House have decided to do nothing except complain about everything that President Donald Trump (R) does or does not do.  Their sole purpose in life is to obstruct, criticize and delay.  There will be no significant contributions from the Democrats – not even from those who would like to participate but fear retaliation by House Minority Leader Nancy Pelosi (D-CA) – so we can forgive them for not working very hard.

But 239 Republicans cannot do more than one thing at a time?  Give me a break.  There is no physical limitation, no legal barrier, no lack of time, no shortage of staff and outside expertise.  This is either institutional laziness or ineptitude.  These are people who apparently never learned to walk and chew gum at the same time.  They should be embarrassed to ask the voters to return them to continue their somnolence and the voters should be embarrassed that they do continue to return them.

Having waited eight long years while former President Barack Obama (D) stood on the economy’s air hose, it is nearly criminal that we now have to wait another year – maybe more – for the Congress to get off its dead butt and provide the type of tax reform that will generate economic growth, increased jobs and new prosperity.

Given that the Republicans have had majority control of the House of Representatives for six years you would think they would have had a plan that had already been “saucered and blown” and ready to go.  For six years we have had to listen to the Republican leadership tell us that they could not do anything because they did not have a Republican president.  You would think that now with the inauguration of President Donald Trump (R) they would have that plan ready for debate and passage the day after Mr. Trump’s inauguration.

But they do not have a plan.  Oh, there are plans out there.  There are even good plans out there.  But between the intra-party jealousies, the inter-chamber jealousies (nothing the House could propose would be satisfactory to the Senate and visa versa) and the aggressive lobbying by those to whom many members of Congress owe their soul, there is not “a plan.”  And it is that latter group that gives rise to the presumption that the Republicans are not really talking about tax reform – rather they are talking about reshuffling the deck.  They are arguing about the winners and losers under the new tax proposals – that’s why there is no tax plan yet.  They aren’t really looking for a new plan; rather they are reshuffling the existing plan.  And when they are spending their time on that, you can be assured that the interests of the general public just went out the door.

Let me reiterate the six hallmarks of real tax reform:

1.  Taxes should be designed to produce the revenues necessary to fund the legitimate functions of government – that’s it.  Nothing more, nothing less.  Taxes should not be used to encourage or discourage investment in particular lines of business.  Taxes should not be designed to redistribute income or wealth.  And taxes should not be designed to encourage or discourage a particular form for doing business.

2.  Everyone should be required to pay taxes.  The whole concept of a representative democracy is that the law, having been adopted through the representatives of the people, should apply equally to all.  If you start carving out exceptions for the application of the law – even the tax laws – we are no longer a nation of laws but rather a people subject to the whims and caprice of the powerful.

Unless all pay taxes, all are not equally impacted by the decisions of government – and particularly not impacted by increases in taxes.

3.  The calculation and payment of taxes should be simple and efficient.  Today, the Internal Revenue Service employs slightly over 82,000 people.  There are at least that number in the private sector who attempt to provide guidance, preparation and defense for taxpayers.  Not one of them provides any benefit.  In fact, they represent a sword (IRS) and a shield (tax consultants) both paid for by the same taxpayers.  The tax system should be so simple and transparent that anyone who can perform a job can complete and file a tax return.  The elimination of tax deductions – all tax deductions – would further simplify the tax system and ensure that Congress does not engage in picking winners and losers in the competitive markets.

4.  If progressive tax rates are used, they should result in no more than four categories.  There are good policy arguments for a single tax rate applicable to all levels of incomes.  However, we have become accustomed to graduated rates for increasing levels of income.  If that is to continue under a “tax reform” they should be limited in number and correlated to a specific economic measures.

5.  Taxes should allow for self-funding of retirement.  The one exception that I would recommend to such a simplified tax system would be the continuation of special treatment for retirement savings.  According to a 2014 study by the Tax Foundation:

“However, over the last fifty years, U.S. saving and investment have eroded substantially, and during the most recent financial crisis, they collapsed almost completely. At the national level, the U.S. is essentially treading water. Citizens are barely running enough household surplus to make up for government deficits, and businesses are barely investing enough new capital to make up for the depreciation of old capital.”
The degree to which we provide for our own retirement has a direct and significant impact on the amount required from tax funded sources – welfare, Social Security, etc.

Instead of picking through the existing tax code and determining the special treatments that should be continued, modified or eliminated, the Congress would be better served by simply repealing the entirety of the current tax code and starting over using these simple requirements.  Yes, some individuals are going to lose their special tax benefits and if that requires them to pay an increased amount in taxes – tough.  Yes, some businesses are going to lose their special tax benefits and if that means that they will suffer financially – even go broke – tough, it means they didn’t have a viable business in the first place.  And finally, there may be people who have never paid taxes who will now have to pay them – tough, it means that they will now have to now pay for all of the government benefits that they previously received for free.

But don’t hold your breath.  The tax reform that Congress will enact will be another jumble of special treatments, deductions, exemptions, and favors.  It will still take an army of specialists to file your taxes and will provide Democrats a litany of grievances to air as they point out who gets special treatment.

President Trump could short circuit this process.  He could call the congressional leaders into his office and lay down the markers for tax reform and tell them that any significant deviation is unacceptable.  He could then take that message to his supporters, point to the special interests who control Congress and demand that they be brought to heel.  Draining the swamp in Washington requires neutering the special interests.  Tax reform is a good place to start.