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Why Tax Reform Is Tough

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Why Tax Reform Is Tough

November 6, 2017

It has taken until November 2 for the House Ways and Means Committee to release its tax reform package. Just as last year’s Better Way blueprint was a high water mark, so is the released proposal.   It has been surprising to many that the initial set of proposals could be turned into legislation and considered without substantial changes. 

There is a reason why there has not been major tax reform since 1986.  It’s tough, it takes time, and there are a lot of trade-offs.  Just as the Ways and Means Committee had to give in on a number of desired provisions—the top individual rate, the number of tax rates, deductions, the border tax, and others—there will almost certainly be other modifications between now and votes in the House and Senate.  Neither the House nor the Senate has much of a margin of error.

Only time will tell whether this bill will pass Congress and go to the president for his signature.

Tax reform is tough because the tax system creates and rewards special interests who fight hard to preserve what they have.  For example, high-tax states want to retain the deduction for state taxes, charities fear that people won’t give if they can’t deduct, and home builders and mortgage bankers believe that the loss of the mortgage deduction will penalize them.

Special interests who currently benefit are well organized while the larger set of potential beneficiaries aren’t.  Indeed, tax reform or tax rewriting is the art of cheating.  Politicians want to extract money from some taxpayers without revolt so that it can be redistributed to the favored in a way that buys support.

Democrats and Republicans can’t agree on a set of organizing principles.  Democrats believe that government can spend tax dollars better than taxpayers; Republicans believe just the opposite.

The bottom 50 percent of income earners who pay little federal individual income tax see no reason to support tax reform.  Democrats want more wealth redistribution and progressivity; Republicans want lower taxes for those who pay them.

Complexity rewards lawyers, accountants, lobbyists, and those who can afford to find ways to game the system.  The powerful want to remain powerful and tax reform not only can reduce their wealth but also their influence.

As disgraceful as the public believes the tax code to be by favoring the wealthy and privileged, they also believe that change could make it worse and penalize them further.  The current level of distrust in Congress only compounds the difficulty of being able to make real reform happen.

Too few take a long view of what is best for economic growth and individual taxpayers.

Without attacking spending, especially Social Security and Medicare, tax reform is unlikely to stimulate enough growth to reduce deficits and the debt.

The 1986 Tax Reform Act, which has been described by Current Events as “the single most sweeping change in the history of America’s income tax”, took two years to accomplish with a correlation of forces that would be difficult to duplicate today.  What might make it possible is the recognition that the economy can do better and tax reform can be the needed catalyst as well as the public’s recognition that the current tax code has been a source of the swamp that the President promised to drain.

Time is short and the challenge is great.   But even with the inevitable compromises to get enough votes, the economy and individual taxpayers will benefit from a simpler, fairer, and more transparent system of taxation. 

William O'Keefe is a contributor to Economics21.

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