The White House has laid out an aggressive schedule for passing tax reform legislation sometime this fall. That schedule means that tax reform will have to be tied to the budget and passed under reconciliation. After the health care debacle, enthusiasm and certitude need to be tempered by a large dose of reality and a good understanding of what would be deemed acceptable by the Senate Parliamentarian.
The House’s Better Way tax reform plan is based on solid principles but it also involves a number of elements, such as border adjustment, that represent significant departures from the current tax code. That is going to make the sell in the Senate very difficult.
The White House supports eliminating or curbing numerous tax breaks to offset some of the lost revenue from cutting tax rates but those “tax breaks” are not identified and surely will cause some Senators to balk. The White House plan includes cutting the corporate tax rate from 35 percent to 15 percent, simplifying the taxes individuals and families pay, eliminating the estate tax and jettisoning the alternative-minimum tax. Senator Hatch has dismissed that objective as unrealistic.
After the embarrassment of not being able to pass a republican only health care bill, there should be some reluctance to attempt the same approach with tax reform. But, bringing democrats on board also represents a major challenge. Democrats have issued a letter that identifies three basic demands: any tax legislation should be drafted under the regular bipartisan committee process; the legislation should deliver relief to middle-class families without tax cuts for the rich; and any tax changes should include at least as much revenue as is collected today. Although this is the democrats opening gambit, it is not clear whether the two parties can come together on a reasonable set of changes.
It is a virtual certainty that both parties are applying game theory or something analogous to it. The democrats don’t want to give the republicans any victories so that they can make a stronger case in next year’s elections. At the same time, they cannot be seen as total obstructionists on taxes which has a high priority with the public.
The republicans would prefer to pass tax legislation without compromising but after the health care vote cannot count on 50 sure votes on comprehensive legislation along the lines of the House’s Better Way. Further, comprehensive tax reform involves a time consuming process of tradeoffs, which the republicans cannot not afford. They need to pass something this year to bolster their re-election prospects in 2018. The tax reform act of 1986 took two years from start to finish. The republicans cannot take that much time after failing to pass any major legislation that appeals to the public.
Given all of the political constraints that exist and the number of legislative days remaining, there is no realistic basis for believing that anything as comprehensive as the Better Way will get passed. Corporate tax reform is essential to help US companies compete in a world where the average OECD tax rate is 22.5%. Lowering corporate rates will probably be paid for by eliminating some business deductions. The business community will probably go along—sullen but not mutinous—as long as the result is a level playing field and avoidance of dual taxation on foreign earnings.
On the individual side. Lower rates and simplification should generate strong support, especially if the top rate remains the same or close to it. Mortgage deductions, state tax deductions, the inheritance tax, and the capital gains tax could be candidates for revision as long as changes do not penalize the middle class are seen as benefitting them more than the top 10%.
One change that Congress should consider and which would be very popular with the average tax payer is for the IRS to prepare draft returns for review and approval by tax payers. The service already collects the information needed to do so. According to an article The Atlantic—10 Second Tax Return –“ Eight OECD countries, including Finland and Norway, fully prepare returns for the majority of its taxpayers. In Estonia, it famously takes the average person five minutes to file taxes”. That one reform measure would save taxpayers time and money spent in completing their annual tax returns and go a long way in restoring confidence in Congress.
The electorate is rightfully unhappy with the performance of our Federal Government. Unless the Trump Administration and Congress start doing the peoples’ work both could pay a heavy price at the polls. Modest tax reform now followed by a major simplification initiative would help to restore faith in our system of government. The current tax code has grown from 26,000 pages at the time of the last comprehensive reform to over 74,000 pages today. It needs major streamlining and simplification.