Grading the House Tax Reform and Reduction Proposal

Right From the Start

The House Republicans have released their version of the tax reform and reduction package long promised by the GOP. In my view they get about a C- for their efforts. Before critiquing their effort I would note that I am not a believer that perfect should be the enemy of good. Progress and improvement should be noted and hailed. And in this case virtually any change from the “gawdawful” tax system we currently have can be considered progress and improvement.

I have noted in the past that I have a relatively simple economic situation. My income consists of my stock market investments and my social security benefits. I do not have a business that requires me to track revenue and expenses. I do not have any partnerships or exotic investments in mining, oil production or even real estate rentals. My deductions consist of my charitable contributions and my taxes paid, which combined exceed the standard deduction. And despite that it takes me nearly twenty hours spread over three or four days to accumulate, calculate and complete my state and federal tax returns. Many of my friends in similar circumstances utilize professional tax preparers at a significant cost to them. In short – that is outrageous.

Ever since the tax reform and reduction package proposed by President Ronald Reagan and adopted by a Democrat controlled Congress there has been a steady erosion of tax simplicity and fairness spurred by a combination of voracious special interests, tax and spend liberals and social engineers hell bent on promoting uneconomic choices.

In previous columns I have detailed the fundamental principles for a tax system. They are as follows:

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.

The Republican tax proposal fails in all regards to this principle. It begins by assuming that all current expenditures are “necessary” – that is the essence of the Current Service Level (CSL) budgetary process utilized by most governmental entities including the federal government. By utilizing this form of “budgeting” the federal government assumes that every program currently in existence is necessary and is a legitimate function of the federal government. As a result every program grows annually by a percentage factor – usually based upon a combination of inflation, population growth and/or beneficiary growth. Regardless of the formula, the growth always exceeds inflation and usually economic growth as defined by either personal income growth or gross domestic product (GDP) growth. The fact of the matter is that the federal government intrudes on matters best left to the states – education, welfare, healthcare, environmental standards, housing, energy production, urban development, labor relations, agriculture and a host of other sub-categories. The bureaucracies created accelerate the growth by a continuous growth in rules, regulations and intrusion – they have to in order to “justify” their positions.

In addition, the Republican proposal continues the liberals’ fascination with social engineering. For instance, it enhances the redistribution of wealth by increasing the number of people who will qualify for income tax refunds despite that fact that they paid no income taxes. It continues the energy tax credit for solar energy and reduces, but does not eliminate, the tax credit for wind power. In addition there remains special treatment for nuclear energy facilities and oil and gas production. Even the $7500 tax credit for the purchase of electric automobiles continues despite the fact that it gives such vehicles an unfair competitive advantage. None of these should have survived a real tax reform proposal. All of these tax treatments fall in the category of social engineering.

Even the oft criticized “carried interest” deduction for the Wall Street hedge fund managers remains reflecting their substantial political contributions to both parties and to Hillary Clinton in the recent presidential election.

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.

According to Forbes magazine 45.3 percent of those filing federal income tax returns wind up paying no federal income tax. Add to that the significant number of people who do not file returns because they are welfare recipients and have no taxable income. The House Republican proposal will increase that by increasing the standard exemption. It would appear that the majority of citizens of voting age will not pay for the decisions of those for whom they voted – thus the rise in the welfare state and the popularity of uber left politicians such as Sen. Bernie Sanders (Socialist –VT)

Oregon state government has become a national leader in increasing taxes by exempting a majority of those with taxable incomes – thus guaranteeing passage. Oregon is dominated by the Democrat Party, which is funded by the public employees unions which, in turn, are routinely exempted from paying tax increases. There is a free lunch in Oregon for the welfare recipients, the public employees, and those earning less than $50,000 annually. Alexis de Tocqueville once noted:

“A democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.”

And followed that by noting:

“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

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.

The original tax proposal was to have traded off an expanded standard deduction for elimination of most itemized deductions. That is the essence of tax simplification. However, in the current version, the Republicans have instead increased the standard exemption but continued the major tax deductions – charitable deductions, mortgage interest deductions, and deductions for state and local taxes. In doing so people like me will still be required to spend hours and days accumulating, calculating and completing my tax returns – there will be no one page filing for me.

Still, when all is said and done – and in this instance a lot more is being said than being done – I’ll take the House proposal over the current mess any day of the week. Still, we have yet to see what the Senate will propose and whether the Senate with the likes of Sens. John McCain (R-AZ), Bob Corker (R-TN) and Jeff Flake (R-AZ) can actually pass a bill.

But there is another element of this that should be graded and that is the process by which the Republican leadership achieved its proposal. And for that, I would give the House leadership an F. President Trump has accurately criticized the administration of former President Barack Obama for negotiating deals by giving away everything and getting nothing in return. Mr. Trump’s two favorite examples are the Iran nuclear agreement and the lifting of the Cuban embargo. But the same can be said of the Republican House proposal. The leadership caved into Democrat whining about tax reductions for the rich, elimination of deductions for state and local taxes (the high income tax states being primarily overrun by Democrats), and alternative energy tax credits. And in return the Republicans got not one single vote from the Democrats. The House Republicans bargained against themselves and lost. It is reminiscent of the French Civil War in which both sides lost and the English won. In this case the conservatives and moderates both lost and the Democrats won.

Really if these are the smartest people in America we are in deep, deep trouble.