The good, the bad, and the ugly of tax reform

Eyeglasses with newspaper and coffee cup

Earlier this week, the Chairman of the House Committee on Ways & Means and the Chairman of the Senate Finance Committee – Rep. Dave Camp (R-MI) and Senator Max Baucus (D-MT), respectively – co-authored an op-ed on tax reform. Much of the piece provided good and necessary information, include reiteration of basic principles of tax reform, but there were some concerning indications about the direction of any reform efforts. Below are some quick takes on the good and bad in the op-ed:

First, the Chairmen claim nothing will be done behind closed doors:

We are dedicated to writing bills in an open and transparent fashion. No cutting deals behind closed doors. You get a say, employers get a say, and our colleagues—your representatives and senators—will get a say.

This paragraph is a mixed bag. Yes, you the average citizen can have a say by communicating with your Member of Congress, and through social media and other forms of activism. And I hope the Chairmen will be transparent during the legislative process. But history shows most politicians don’t say the same things in public as they do behind closed doors, which means either some portion of the discussions will indeed be done away from the cameras, or the Chairmen will have their work cut out to change the perspectives and media strategies of their colleagues.

Second, they highlight two types of tax loopholes:

So, while we cannot provide you every detail of the bill today, we can commit to you that we are writing tax reform bills. We’ll look to close loopholes like those used by some lawyers and celebrities to avoid paying the payroll tax on much of their earnings. We’ll make sure that companies can’t avoid paying tax on income they earn in the U.S. by pretending that they earned it in an overseas tax haven instead.

While it is good to see bipartisan agreement on certain segments of loopholes, the fact is that most of the biggest tax loopholes are popular, and many benefit middle-class Americans. So even eliminating the loopholes most benefiting the rich may not make as much of a dent in either loopholes or lower rates as hoped.

I reached out to both offices to clarify this concern. According to Camp Spokesperson Michelle Dimarob, “there aren’t scores [meaning, official estimates of dollar values of tax loopholes, credits, etc.] for the provisions. They are illustrative examples that Congress needs to make in an open and public process. The Joint Committee on Taxation will issue a report on the working groups in the Ways & Means Committee on May 6, and we anticipate additional hearings that will provide a public setting to continue gathering input from stakeholders.”

Dimarob also clarified that Chairman Camp “has been pretty up front that everything is on the table, but simplification and cleaning out of the code goes beyond the things people often think of when they think of reform. For instance, a 2011 report by Ernst & Young noted that in the ’86 Act, that a good portion of the revenue for tax reform came from other changes to the code. In addition, the use of credits and deductions by top earners far outweighed those used by the rest of taxpaying Americans, as shown in a chart the House included in its budget two years ago.”

Next, the op-ed toys with class warfare:

The first is a boost for America’s families. People don’t mind paying their share as long as they know they’re not getting the short end of the stick. Simplifying the code means regular families will be on a level playing field with those who can afford high-price tax advisers.

Again, many of the largest and most popular tax loopholes benefit America’s families. Second, those who can afford the highest-quality tax accountants and attorneys are also the people paying the most amount of income to the federal government – this has been the case for decades. Third, what is someone’s “fair share” of the federal tax burden?

Next up is more class warfare:

We’ve agreed that tax reform should result in a system that is as progressive as the current one. Tax reform will close special-interest loopholes to help lower rates. We will ensure that low-income and middle-income Americans will pay no more taxes than they do under current law.

 These gentlemen have just admitted two things in this paragraph. First, they are both a-okay with continuing to tax upper-income earners much more, as well as at a higher rate, simply for earning more – the current marginal tax rate on upper-income earners is several times that of lower-income earners. This seems to indicate that honestly earned money belongs to the government first and the earner second.

The second thing this paragraph all but admits is that tax rates will go up on the wealthy – otherwise, the op-ed would reassure that all Americans, not just “low-income and middle-income Americans,” will see their tax rates stay the same or go down.

I have followed up with both offices about this paragraph. According to Dimarob, my take on the section is inaccurate. She said the goal is “two brackets of 10% and 25% for the individual side of the code, with a top tax rate of 25% on the corporate side. These same brackets have been included in the last two House-passed budgets as part of the foundation of comprehensive tax reform. Regarding progressivity in particular, it will be more than just rates in the big picture. Those details and policies are still being worked through. There is much more to come.”

This is somewhat reassuring. While a 10% and 25% rate, plus a corporate rate, is certainly imperfect, this is a great step in the right direction.

The op-ed’s final body paragraph is right on:

The second principle is to level the playing field for U.S. employers. The current U.S. corporate tax rate is the highest in the world. Yet in recent years, some of America’s largest corporations have paid zero tax. The current system picks winners and losers and puts the U.S. companies at a disadvantage in the global economy, a situation that hurts job creation. Tax reform must make our companies more competitive in the global economy.

 Exactly correct. Some corporations pay a lot of taxes, some don’t. This needs to change.

In the end, the nation needs tax reform almost as badly as it needs spending cuts. Let’s hope these gentlemen can get the job done.