Answering Tax Reform’s Critics

tax reformWith the passage of tax reform, opponents have ratcheted up attacks.  In addition to bogus criticisms, they show poll results reportedly demonstrating that a majority of the public opposes the legislation.  That is hardly a surprise or very enlightening since polls can be constructed to confirm desired results.  It is also the case that since the Republicans first came out with their Better Way plan, their reform structure has been attacked.  

It is easier to sell claims of unfairness, sellouts to the wealthy, and increasing inequality than it is to educate a large segment of the public about the complexity of the federal tax code, especially when distrust of government is so strong.  As a result, many are all too ready to believe that any Republican tax plan will not benefit them or middle class.

A tax reform plan is always easy to attack because any tax plan will fall short of the ideal. The legislative process is about producing a majority and that involves compromise and tradeoffs.  But focusing on shortcomings leads to erroneous conclusions.  As analysts are fond of saying, if a problem is poorly defined, it will be poorly solved.  The proper focus is not its shortcomings but what it achieves.  That can be judged by the answer to a simple question: will the just-passed legislation produce a better tax system than the status quo?  The answer to that is an unqualified yes.

An emphasis on corporate tax reform is appropriate because the current system works to the disadvantage of US companies, their workers, and their shareholders.  No matter how well US companies compete around the globe, their efforts are constrained by the highest tax rate in the developed world. Over time, companies have been able to gain various tax provisions that lower their effective rate but this has made the code more complex and rewarded those who have the money to hire good lobbyists and tax specialists.

Some companies solved the problem by becoming owned by a foreign company and investing more in lower-tax countries.  The just-passed legislation will make such games less profitable.  Provisions to encourage companies to repatriate about $2 trillion held offshore and the immediate expensing of capital investments create incentives to invest more domestically and reward shareholders.

Claims that none of this will benefit the economy or workers flies in the face of common sense.  Money that is given to shareholders either through share buybacks or dividends increases the value of pension funds and provides funds that are either reinvested or spent, which clearly benefits the economy.  As companies invest more they will hire more and increase productivity which leads to wage increases.  Shifting investment incentives from foreign countries to the US benefits workers and consumers.

On the individual side, criticisms that only the wealthy benefit and that tax rates are not being made more progressive are clearly factual distortions.  According to the Tax Foundation–TF–, the top 10 percent of taxpayers pay over 70 of individual income taxes, and it is estimated that as many as 45 percent of wage earners pay no federal taxes.

Those two statistics demonstrate that the tax code is highly progressive, too much so in fact.  Provisions in the proposed tax legislation that would limit mortgage deductions and deductions of state and local taxes benefit the middle-income taxpayers at the expense of the wealthy. Those two data points also make it obvious why a skewed distribution in taxes paid results in higher income people receiving the greatest benefits from a reduction in rates.

Now that the bill has been signed into law, perhaps those who have been hyperventilating will settle down and face the realities that the legislation will produce.  Companies and individuals will be able to keep more of the money they earn.  The economy will benefit because those who earn money will spend it more effectively than the government.  And, whether a small step or a big step, the legislation will produce a tax code that is better than the existing one.

A growing national debt and the failure to reduce deficits are legitimate concerns.  But we should not forget Ronald Reagan’s truism that it is not that we are taxed too little, it is that the government spends too much.  Let us hope that  Congress now turns its attention to trimming waste and reforming entitlement programs.

From - E21 - by William O'Keefe

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