Tax Reform? I'll Pass

Politico is reporting that the proposal set to be released today by Republican Congressman Dave Camp, Chairman of the House Ways and Means Committee, will include some items designed to attract Democratic support for the bill. Camp is expected to announce a surcharge on the very wealthy and a tax on banks, all of which are sweet music to liberal ears.

There are few things that Congress could do to better repair their image as narrow-minded, corporate lobbyist-loving, ideologically driven apparatchiks than enact tax reform. And, there are few things that would better stimulate economic growth than tax reform. And, there are few issues on which Democrats and Republicans agree action is needed than tax reform. With all this in its favor, who would be so stupid as to oppose an overhaul of the tax code?

Me, that’s who, and my reasons are several.

Tax reform is one of those issues that only happens once a generation. The last major overhaul of the tax code came during Ronald Reagan’s second term when Reagan’s economic team and Senator Bill Bradley negotiated a deal that eliminated hundreds of special deductions and lowered rates across the board. That remains the essential recipe for tax reform: Eliminate special treatment in exchange for lower rates. And, it is a fine and profoundly small “d” democratic recipe because all those special exemptions crept into the tax code because corporate lobbyists got them inserted. There is no lobbyist for the average taxpayer, so when someone gets a special break, the rest of us have to pay the balance. But, the recipient of that special break really, really cares about it and will move heaven and earth to keep it, so in order to eliminate any particular tax break, you need to round them all up, or most of them anyway, and get rid of them all at once, so that special pleading is diluted as the rest of us warm to the prospect of lower rates. Once a tax overhaul is enacted, then the members of the Ways and Means Committee quickly get back to business of inserting a new round of special tax benefits for their allies, and the whole process begins again.

Because this happens only once a generation, it is very important to get it right and, so, we come to my principal objection to doing tax reform now: I can’t imagine that this Congress and this White House will get it right. House Republicans are still too beholden to their Tea Party base to engage in the kind of new revenue needed to seriously address the long-term fiscal debt. And, this White House did not run on a campaign of addressing income inequality and, consequently, has no mandate to use tax reform to achieve a more just distribution of the nation’s wealth.

Additionally, I fear that in the face of protracted, difficult negotiations, both the House GOP leaders and the Obama White House are inclined to go, and to think, small, as we saw in the budget negotiations between Congressman Paul Ryan and Senator Patty Murray late last year. When faced with an imminent breakdown in negotiations, the key is to think bigger, not smaller, especially when it comes to taxes, but “big thinkers” is not precisely how we would describe today’s GOP leadership or Team Obama, is it?

I have not seen Cong. Camp’s proposal, but none of the news reports indicate it will address the most regressive taxes, payroll taxes. It is insane that Social Security is funded by a payroll tax so that all the millions of new wealth generated by the stock market, the internet boom, etc., produced virtually nothing in federal revenue to shore up the nation’s looming demographic crisis, the retirement of the baby boomers. It is past time to either draw Social Security from general revenue, or to remove the cap on income subject to the Social Security tax, and to apply the tax to non-wage income.

Of course, Republicans would balk at this, but perhaps they would not balk if this proposal was linked to a modified flat tax. I do not believe that all Americans should pay the same tax rate. But, the current Byzantine code obviously favors those with the resources to hire a lobbyist to insert special tax benefits into the code and a team of lawyers and accountants to harvest those tax benefits year-in and year-out. A modified flat tax would eliminate the entire tax-cut-harvesting industry and those lobbyists, lawyers and accountants could go on to find productive work. I insert the vital qualifier “modified” because simplicity in the tax code does not require a lack of progressivity. Marginal tax rates can and must be kept. Going to the tax table is not the complicated part of filing out your 1040. The complication comes from figuring out all the deductions and expenses that get you to a determination of your taxable income. Once you have that, you flip to the back of the tax book and find the amount you owe. A modified flat tax would therefore be simple but still progressive, keeping marginal tax rates at different levels for different incomes, but simplifying the process by eliminating any and all deductions.

As it is, Cong. Camp is set to propose eliminating some, but not all, deductions. The ability to deduct state and local taxes is evidently going by the wayside, which is a deal-breaker to me. Residents of states, like Maryland and Connecticut where I pay taxes, have governors and state legislatures that raise more revenue to build better schools, invest in roads and infrastructure, provide health insurance for the indigent, in sum, take their obligation to promote the common welfare seriously. Why should we be penalized because Mississippi doesn’t care about it’s poor folk? Again, if we were doing away with all deductions, I could swallow this. But, so long as some deductions remain, states that are forward thinking should not be penalized relative to states with a fondness for 19^th century economic stewardship.

There will only be one more bite at this tax reform apple in my lifetime. I would hate to waste it on the kind of reform we are likely to get at this fraught, contentious time in our nation’s politics. Better to have candidates run on a defined plan in 2016 and let the voters decide how they want to move forward, awarding a mandate to one of the two parties’ candidates to enact a more robust tax reform effort. Compromise is in short supply in Washington, to be sure, and I am generally inclined to encourage any and all efforts that bridge partisan divides. But, not this one.