Revising the tax code: What do Republicans really want?

There is actually widespread, even bipartisan, agreement that the U.S. tax code is in serious need of revision. In fact, the most recent major revision was in 1986 and, as historians note, since the federal income tax was instituted in 1916, there has been a major rewrite every 32 years.  Which means, 2018, it’s your turn.

However, there’s no real consensus on what changes are needed and no guarantee that a Republican-controlled Congress won’t make the current problems even worse. Although “alternative facts” are much in vogue these days, there are a few real facts worth keeping in mind as the debate unfolds in Washington this week.

First, despite what Donald Trump keeps saying, the United States is not even close to being the most heavily taxed country in the world. Many nations tax their citizens at much higher rates as part of a deliberate choice to fund a much broader range of services than are available in this country. Universal health care. Free higher education. A much more extensive set of social services.

Second, on the other hand, Trump’s contention that the corporate tax rate in this country is among the highest in the world is correct.  Few companies actually pay that rate,however, because they are able to find loopholes, tax havens and other evasions.  Many pay nothing.  How do you reduce the nominal rate while also increasing the amount of corporate tax revenues? Is there any will in Congress to address the abysmal level of compliance or collection among U. S. corporations?

Third, the “theory” of supply side economics–that the economy and the rest of society will benefit when the wealthiest among us pay minimum taxes–has never worked in practice.  If supply side economics actually worked, the growing disparities in wealth and income in this country in the past two decades would already have stimulated major growth in the economy.  Instead, executive salaries are rising to historic highs, stock buy-backs and increased dividends are much more prevalent, and employee pay raises and investments in business are lagging. And wage earners fall farther and farther behind.

Fourth, the tax code is entirely too complicated.  Only 10% of Americans fill out their own tax returns; 60% use tax-preparation agencies and another 30% use tax-preparation software.  It is estimated that American families spend 3.16 billion hours each year getting their tax forms completed.  By contrast, many European countries have returns that can be filled out in less than half an hour.

Here we get to the challenge of rewriting the tax code.  The 1986 revision was widely seen as a significant advance, simplifying the rules, achieving a progressive structure and raising enough money to fund government.  Since then, however, Congress has regularly found ways to modify and amend the law, carving out exceptions and special provisions, sometimes for a single company.  The irony is that while the IRS is routinely seen as the villain in our tax system, it is Congress that keeps messing it up and Congress which makes it more difficult for the IRS to do its job by repeatedly reducing its budget.

One of the great acts of hypocrisy that we see regularly is members of Congress pledging to make the system easier for taxpayers–while knowing that their capitulation to lobbyists requesting special favors is a major reason why tax forms are so complicated.

Similarly, new tax legislation will test whether Republicans actually care about budget deficits or only are concerned when there is a Democratic President.  I would bet on hypocrisy triumphing yet again.

What can we expect from the latest Republican tax initiative?  Its really hard to say since they have kept their proposal secret.  Any piece of legislation that impacts as many people as the tax code does and is as complicated deserves–indeed demands –extensive public hearings and lively debate, what Senator John McCain has called “regular order.”  If they have their way, Republicans will pass a bill in the dead of night with no hearings and little public awareness of what is being enacted.

Donald Trump clearly has no idea what the proposal will do, just as he had literally no understanding of the various pieces of health care legislation that were proffered earlier this year.  He wants something he can call a “win”, regardless of its content.  While he has made various promises in the past about what he would support–no changes in 401 (K) plans, tax increases for the wealthy–he is very likely to renege on those pledges just as he has so many others.

Similarly, because he has never released his own tax returns, Trump’s claim that he will not personally benefit from the new tax law is impossible to verify.  The exception is the effort to eliminate the estate tax, which would save his family hundreds of millions of dollars.  In fact, the beneficiaries of such a change would constitute far fewer than 1% of taxpayers and is hard to justify on any grounds.

Most Republican tax proposals in the past have had two objectives: lower the tax burden for the wealthy and force a reduction in the size of the federal government by making less revenues available.  The rhetoric surrounding the current proposal is substantially different from that, but, unless a few brave Republicans stand up for the truth, that will be the outcome again this time.

There are, in fact, examples from other countries of how we could greatly improve our tax system, but there’s no chance that any of those will receive any consideration in the current political environment.  The best we can hope for is less rather than more damage.  Unfortunately, that sentiment can be applied to most of what is going in in Washington these days.