The Big Problem With Tax Reform

It’s that time of year when millions of Americans can be found gazing disbelievingly at their tax returns and having sudden attacks of small-government conservatism.  It’s not just the fiduciary ouchie of Uncle Sam’s annual pocket book pinch that stirs up pique and vexation. Most people get that taxes are a necessary evil and we all have to cough up something. Less understandable is why the obligatory villainy has to be so damn unfair and complicated.

There’s no doubt we need tax reform. The United States tax code is currently a codex of bean counting hieroglyphics that not only takes our money, but also mocks our incomprehension. The cryptic incantations tax accountants annually sprinkle over spreadsheets animate the government’s extended palm alright, but they also raise the middle finger of its other hand.  This gets us all steamed. None of us really understand what’s going on, but we’re all pretty sure we’re getting shafted and that something really should be done about that. Well, be careful what you ask for. Something is about to be done.

The problem we have right now is not the clear need for tax reform, but the people who are about to take on the task. This would be President Trump and his (cough) loyal troops controlling Congress. Now under normal circumstances I’d be okay with the GOP taking point on a tax code touch up. But we’re not talking about a bunch of establishment and main street types with a strong sense of noblesse oblige taking on the job. Nope. Who we have chomping at the bit to blue-pencil the government’s revenue rulebook is a motley collection of corporate chiselers, Ayn Rand fanboys, and pettifogging market militants shilling little more than libertarian moonbeams. This will not end well.

A big part of the problem seems to be that this group has bought into the broadly shared assumption that tax reform is easy. It’s not. For example, most people who are not rich think those on the upper end of the income scale are a bunch of tax dodging ripe sucks. So the obvious and fair thing to do is just adjust the rules to squeeze a few more shekels out of the fat cats and silk stockings. And, fair enough, this crowd clearly has access to feats of tax dodging prestidigitation not available to mere mortals slogging through their 1040s with nothing more than coffee and a cheap calculator. But the rich already pay most of the taxes. The folks at the tippity-top of the remuneration pyramid—the 1-percenters—pay roughly half of all the income taxes collected.  The top 50 percent of earners pay pretty much all of the federal government’s income tax revenue. Roughly half of Americans pay zilch in income taxes, mostly because they haven’t got much income to tax—these are the working poor, the elderly living on social security and the like.

So, what’s a fair adjustment here? Shove more of the burden onto the wealthy? Well, it’s no secret where the sympathies of the Republican tax reform principals lie. They want income tax cuts, which basically means the moneybags will be paying less. Does it mean the poor will be paying more? Probably. The Trump administration is already trying to get rid of Meals on Wheels. If they’ll take away a hot meal from granny, I doubt they’d have scruples about skimming off her Social Security check too. And good luck with that. Regardless of the specifics, any demographic shift in tax burden—inevitable in any major tax reform–is going to be politically explosive.

Well, what if we forget about who is paying and what constitutes a fair share. Let’s just try to simplify the tax code, which all agree is a convoluted thicket of rules and laws, credits and deductions, all of it held together with loopholes and bookkeepers’ chewing gum. Why not just ditch all this deduction and exemption jazz and go with a flat tax, an idea that still has plenty of supporters in the GOP? Let’s say you pay 20 percent of everything you earn over $50K, and tack on another percentage point or two for income levels that get progressively north of that. That makes things simple, right enough. But that too is almost certainly going to bring about a big shift in tax burdens—under most flat tax proposals the rich are paying less and the bottom half are paying more. And we’re right back to the big political stink of the last paragraph.

Well, maybe we could just prune out some stuff. Problem there is where you see a thorn ready for the shears, others see a rose. Pretty much every group you care to mention has a big chunk of the tax code dedicated to its own self-interest. For example, the middle class loves the ability to deduct mortgage interest from income, a perk that costs the federal government nearly $100 billion in revenue every year.  Good luck prying that prized bennie out of the hands of middle-class homeowners. Those folks vote. Well, what about ending the deduction for state income taxes? Texans would be fine with that because they don’t pay state income tax. On the other hand, folks with state income tax rates at or near double digits—Iowa, California, Minnesota and New York—are going to howl because they’ll get dunned extra.

In fact, all reform paths lead to pretty much the same political pong – somebody is going to feel gulled and they are going to raise a stink. That inevitably leads to liberal applications of emollient special breaks, and exemptions, and exceptions … in other words just the sort of special interest sugar boogers that gets people all worked up in the first place. Here’s the bottom-line: the real problem with our tax system is not its complicated rules or its inequitable distribution of revenue burdens.

You see, we want a lot of stuff from government—social security, health care, education, the 82nd Airborne, interstate highways, crop insurance, someone to catch the baddies, and someone to help when Hurricane Obvious blows through and leaves that tree hugging smartass saying “I told you building in a floodplain was a bad idea.” All of that costs, in technical terms, a crap ton of dough, and most of us would prefer somebody else popped for it. That is the central, unavoidable problem of any attempt at tax reform: We want a lot from government and we want someone else to pay for it. Russell Long, a United States Senator from Louisiana and well-known tax law wonk, once summed up the central conundrum of tax reform in three lines of doggerel:

Don’t tax you

Don’t tax me

Tax that feller behind the tree

And there you have it. Tax reform is always sold on the promise that the fellow behind the tree is a mooch and we can make things right by making him pony up his fair share.  But there is no fellow behind the tree. Until everyone gets that, tax reform is always going to be political nitroglycerine. Before we try to rewrite the tax code what we really need is a grown-up conversation about what we want from government and what we are willing to pay for it. Then, and only then, can we meaningfully get down to the business of figuring out how to split the tab fairly.

Political scientists don’t know much (see our predictions on Trump’s electoral prospects). But we are pretty confident that we are not going to get that conversation. What we’re going to get is what usually happens with major tax reform efforts—a political bun fight that leaves everyone ticked off and convinced they are stuck paying for somebody else’s dessert. The only real guarantee is that whatever tax reform flummery the GOP whips up, that fellow behind the tree is not paying for it. Just you and me.

 

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