The Senate Tax Plan: Why Bother?

Right From the Start

The do-nothing United States Senate led by the Republicans has given us its first draft of “tax reform and reduction” and one has to conclude: “Why bother?

I noted in an earlier column that I do not believe that perfect should be the enemy of good and that where progress is made – particularly against the gawd awful current tax code – it should be acknowledged and celebrated. In this case, with the exception of the tax rate reduction for “C” corporations, there is simply insufficient progress in reform and tax reductions to warrant acknowledgement and celebration – particularly if you are a part of the Middle Class to whom all have promised tax reform and reductions.

When looking at the Senate Plan all I can see is the difference between the Chevrolet Volt (a costly conversion of an overpriced, low end Chevy Cruze) and Elon Musk’s Tesla. General Motors didn’t even try to create an electric car. It just assumed that its gas driven models were a sufficient platform for “forcing” an electric motor into a gas powered design. As a result you got a vehicle that could only get 30 miles between charges and then defaulted to the gas engine. In contrast Elon Musk designed an electric car from the ground up. It is sleek, functional and gets over two hundred miles per charge. One version reflects the status quo (Chevy Volt) and the other reform and revision of the automobile (Tesla).

The Senate version of tax reform is simply a re-work of the existing tax code with minimal adjustments to give the appearance of change. It represents preservation of the status quo and is built to satisfy the special interest that dominate Washington – and particularly the Senate. Really, why bother?

The tax reduction elements are laughable. The Senate Republicans have preserved all seven of the existing tax brackets giving minor percentage reductions to each category. However, the benefits to Middle Class virtually disappear because the bill eliminates the current personal exemptions as well as the deduction for state and local taxes. (I am all for the elimination of the deduction for state and local taxes because the irresponsible tax and spend policies of states like Oregon cause taxpayers in other states to subsidize that irresponsibility. It is ironic that the states with the highest income tax rates who are complaining about elimination of the deduction for states taxes were among the first to eliminate deductions for federal income taxes in the calculation of state income taxes. A better solution would be to increase the standard deduction to ease the burden on taxpayers in states such as Oregon but eliminate the effect of subsidizing by including taxpayers in more responsible states with the increased standard deduction.) But then again, these are the Republican elites and they continue to have a tin ear when it comes to the plight of Middle Class. Again, why bother?

Additionally, the Senate Republicans have virtually ignored small business. Their proposal would decrease the corporate tax rate substantially – a long overdue adjustment no thanks to former president Barack Obama. However, the majority of businesses in America use an alternative entity form – Subchapter S, partnerships, limited liability partnerships and limited liability corporations – all of which tax profits at the individual owners tax rate (pass through rates) – generally well over thirty percent. There is virtually no relief for such business entities despite the fact that they represent the majority of innovation and job creation in America. While the tax reduction for corporations is permanent, the tax adjustments for small business (pass throughs) are temporary and will expire in ten years. So, why bother?

But the Republican elites just cannot leave well enough alone. They seem to revel in the idea of sneaking one by the Middle Class. The treatment of the “pass through” entities mentioned above is just one example. And then, instead of indexing the tax brackets based on the Consumer Price Index (CPI) they propose to use the “chained CPI” which produces a lower “inflation” figure. Why is that important? Well, because it will produce a lower adjustment factor than your actual income growth. That means that the Middle Class will move into higher tax brackets more rapidly. Again, why bother?

But the mere thought that the Senate version might pass a tax terrifies the Republican elites – they would have to take responsibility for all of its shortcomings when they become visible. So, the Senate has included a repeal of the individual mandate under Obamacare as part of the tax proposal. Don’t get me wrong. I think repeal of the individual mandate is a great idea and will hasten the collapse of Obamacare. But in this instance the Senate has already tried twice to repeal Obamacare and failed – thank you very much Sen. John McCain. The inclusion of the repeal of the individual mandate will fare no better than the outright repeal of Obamacare in the Senate and will insure its defeat. Ostensibly it is added to stay within the Senate rule regarding reconciliation bills but in reality it is the poison pill designed to doom success.

In the end the Republican elites of the Senate have produced a bill that is neither reform nor reduction for the Middle Class. You cannot reform a tax code by building on it just like you cannot build an electric car by building on a gas car platform. If you want real reform you have to scrap the whole code and start from scratch – like Elon Musk – and build a tax code that is fair, equitable and democratic. I’ll reiterate the points that I have made in the past:

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.

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.

There is not a single thing in the Senate proposal that meets these criteria. This is just more of the same old crap designed to pay lip service to the Middle Class while pandering to the special interests. Why bother?

There are a variety of tax reform proposals that fit these criteria and represent real tax reform – the flat tax, the value added tax (VAT), the gross receipts tax, and the universal sales tax. Of course, in each instance special interests who have worked hard to complicate the existing income tax code – always to their own benefit or a competitor’s detriment – would be disadvantaged vis a vis the current income tax structure. However, in each instance the result would be fair, equal and democratic taxation.

Most often you hear the liberals/progressives wring their hands about how each of these alternative tax plans would hurt the poor and they would because they each would require everybody to pay taxes – not just the less than fifty percent of income earners who now pay taxes. But taxes are not meant to be for social engineering -–and they sure aren’t meant to provide tax refunds to people who do not pay taxes. Concerns about welfare should be dealt with in the appropriations process – not the tax process. A reform of the welfare system designed to deny long term benefits to those who are capable of working would result in sufficient savings to warrant an increase in payments to those who are unable to work by virtue of disabilities or circumstances.

Sen. Ron Johnson (R-WI) has already said he will vote against it in its present form for precisely the reasons set forth above – good for him. Sen. Susan Collins (R-ME) is likely to vote against it because it would further doom Obamacare – a measure she has said she opposes but has voted twice to preserve. That leaves Sen. John McCain (R-AZ) with the opportunity to again stab his fellow Republicans in the back and deny President Donald Trump any significant legislative victory.

But as for now, the Senate Republican version of tax reform and reduction is neither. Why bother.