Honesty is needed about what tax reform would entail
Taxes, famously intoned U.S. Supreme Court Justice Oliver Wendell Holmes, are “what we pay for civilized society.” Given our tax burden, some may think we aren’t quite getting what we pay for. Federal taxpayers last year paid about $3.6 trillion for a civilized society, while states paid about $20 trillion for the same.
Whether we are getting what we pay for seems a reasonable question, considering the generally deplorable state of our society and politics. Unending wars, incompetent and corrupt politicians, public health epidemics, mass shootings, a failing criminal justice system, and a deeply polarized citizenry are not exactly what one thinks about when contemplating a civilized society.
But let’s leave this awkward question aside to consider the even more urgent question of “tax reform.” There is a considerable effort in Washington, D.C., right now to fashion a political consensus on federal tax policy that would “reform” the monstrosity known formally as the Internal Revenue Code (IRC), Title 26 of the United States Code (26 U.S.C.).
By common consent, the U.S. tax code is the most arcane, least equitable, least understood and most hated national tax code in the industrialized world. Filled with loopholes, bizarre provisions, indecipherable language and zany interpretations, it is almost certainly both the worst tax system among major nations today, and also the worst administered. Our tax system becomes a bigger mess the longer it survives. IRS regulations, embodied in the Standard Federal Tax Reporter, attempt to translate the tax code so that taxpayers can understand it. That document runs to 70,000 pages plus – roughly the equivalent to 60 unabridged copies of “War and Peace.”
One might go on ad infinitum documenting the defects of the federal tax system. Many writers have done so, using entire books to condemn it.
Understandably, it is hard to oppose tax reform, especially when it comes with the tantalizing prospect of tax cuts and simplifying the system. But here’s the rub, and it’s a big one: While the overwhelming majority of taxpayers despise the current tax code, they despise even more the prospects of a tax increase. And a tax increase is what tax reform will produce for many taxpayers.
The respected, nonpartisan Tax Policy Center estimates 7 percent will pay more in 2018, but that will grow to 25 percent paying more within 10 years. Moreover, those hit with higher taxes will not be the wealthy, but mostly middle- and upper-middle income groups. The think tank estimates half of all tax cuts will ultimately go to the wealthiest 1 percent of Americans.
Why does tax reform mean a tax increase for so many? It does so because government in modern times never reduces its overall spending. Just the opposite – year after year government needs more revenue, sometimes just to fund existing programs. Someone has to pay those taxes.
Tax reform then must be a zero-sum game. It never produces tax reductions overall, but instead produces so-called “tax shifting” – public finance jargon for reallocating tax liabilities among different taxpayers. In balder terms, tax reform produces winners and losers. Some will pay lower taxes, some will pay higher taxes.
In principle, this is neither good nor bad, for each society has to decide how it will raise the revenues necessary to pay for “civilized society.” But what is bad, and deserves harsh censure, is the duplicitous political posturing going on in Washington, D.C., today. Proponents suggest that tax reform means only winners, and only a better, fairer tax system. Whether a new tax system will mean something better or fairer will be determined as we gain experience with it. A lot of previous experience, however, demonstrates that today’s reform becomes tomorrow’s problem, as indeed has happened to our current tax system.
But we will not need to wait to find out that tax reform is tax shifting, and not tax cutting. The winners already know that, and the losers soon will.
Let’s be clear. Arguing that tax reform is tax shifting and not tax cutting is not to argue against tax reform. Indeed, the consensus among most Americans is that we badly need some sort of tax reform. But with it, we also need honesty and candor from our politicians about what that new tax system will look like and who the winners and losers will be.
Being straightforward with Americans about tax reform, how it will work, and who will pay for it, is vital. Without that we will get no real tax reform. And we will all be losers.