The Tax Reform Pipe Dream

Congress is preparing to debate the budget deal that includes the tax reform proposed by the current administration, so I thought I’d chime in with my opinion of where this might go. In a nutshell, nowhere.

First, the main thrust of this reform is aimed at reducing the corporate tax rate. The proponents say this will encourage Apple and all the other corporations sheltering trillions overseas to bring those dollars back here, which will increase economic activity here and thus raise additional tax revenue. I have my doubts about that theory, but let’s just say for now that it’s plausible. How many of the constituents of all these congressmen do you think give a rat’s tail about easing the tax burden of big US corporations? I don’t know one. Yes, the lobbyists of all these companies do have the ear of Congress too, but so long as they can continue sheltering all that money overseas, I think reducing this tax is not high on the priority list for those lobbying dollars.

Another component of this reform is eliminating the estate tax. Again, how many constituents really care about this? The family’s affected by this tax do not represent a big swath of the voting base most of these Congressmen need to be re-elected next year.

Other yet-to-be-confirmed details include keeping the mortgage interest deduction (probably because they saw that would never fly) but eliminating most other itemized deductions and increasing the standard deduction. This might sound like a good idea, and it just might be, but I think eliminating state and local taxes as an itemized deduction could be a deal-breaker when the final votes are counted.

The devil is in the details, and there are a lot of details that will have to be hammered out on the floor as this is negotiated. So many details, in fact, that getting the votes needed to pass this very complex piece of legislation at this point seems like a very, very steep hill to climb. With so many moving parts, satisfying the deficit hawks, while also satisfying the spenders, will be like spinning plates. Breaking one will result in it being delayed, and we’ve seen what’s happened to health care reform when these deals are pushed into future Congressional sessions.

As I’ve said here many times before, we really cannot afford tax cuts. Our national debt is as high as it was after World War 2, and the government doesn’t make widgets. We’re either going to default, or taxes will increase to bring it down to a manageable level, as has happened every other time in our history when our debt has piled up. Tax rates are already about as low as they’ve ever been.

The idea of simplifying the tax code sounds very appealing, so it makes for great political rhetoric. But if you look at the history of the tax code, you’ll see how it has become progressively more cumbersome, not because the government is trying to make it complicated and confusing, but because every time someone tries to game the system, the IRS has to add another section to sew up that hole. And gaming the system is the American way. The tax code will always be complicated because we will always be trying to find work arounds to pay less. It’s our nature.

So, even if Congress can get out of its own way to pass this deal, and this seems increasingly unlikely with each passing day even with a Republican majority, simplifying the code is just a pipe dream.