Tax Reform: Why It's Faltering

The various headlines on the pending tax reform legislation are anything but favorable: “A bad way to pay for tax cuts,” “Tax plan may be fatal for some in House GOP” and “Whatever happened to the party of fiscal responsibility?” The crucial question now repeatedly posed: Why is it the Republican Party, presently controlling both houses of congress and the presidency, unable to cobble together, in short order, a tax package which truly benefits and is supported by a majority of Americans?

Perhaps an explanation of tax reform is in order; the following is Wikipedia’s definition. “Tax reform is the process of changing the way taxes are collected or managed by the government and is usually undertaken to improve tax administration or to provide economic or social benefits.” You’ll note the definition doesn’t imply tax reduction, nor specify for whom the benefits will accrue. If truth be told, the practical ramifications of tax reform don’t necessarily benefit a majority of Americans. Who may actually be favored is a most complex matter. Let’s take a closer look at what’s going on in the name of reform.

Although our congressional leaders are in the process of assembling a tax package presumably designed to reduce taxes, stimulate the economy and promote fairness, there’s a constant barrage of charges thrown about to the effect the package, as proposed, will do nothing good. Its detractors contend it will increase taxes on millions of Americans, funnel undeserved benefits to corporations and the wealthy, as well as produce a mammoth federal deficit. The following is a typical complaint from one of its more vociferous critics. “It is a well-established fact that this tax bill favors the wealthy and top earners, not the middle class, especially in states like California, New York and New Jersey, where the state income and sales taxes are high. It is also a well-established fact that all past reductions in tax rates favored the well-to-do. Lowering the corporate tax rates will benefit their stockholders, not the ordinary middle-class consumer.”

The reference to states with high income and sales taxes concerns the proposal to reduce or eliminate the currently allowable federal tax deduction on these expenses – known as the SALT deduction. The fact is those states with the highest such taxes and therefore the most meaningful deductions, are primarily blue states with a preponderance of Democratic voters. For this reason, the accusation is the Republican congress is singling out the opposition party for a special penalty by limiting their access to this substantial tax benefit.

A 30-second ad run in California on the eve of the House of Representatives vote scheduled Thursday, November 16th, said: “The Republican tax plan will raise taxes on California families by eliminating middle-class tax deductions to pay for a massive tax break for the super-wealthy and big corporations.” Not mentioned, of course, is the reason the tax break is massive. It’s because over the years a Democratic-dominated California enacted an ever increasing cascade of tax increases on its citizens. With its top state income tax rate now 13.3 percent, it sets a national record. Unfortunately, any likelihood the state’s leaders might consider favoring its voters by reducing the rate is essentially nil.

Of particular interest in this year’s tax overhaul is a circumstance which may prevent any tax modifications. It relates to an archaic provision known as the Byrd Rule. This is a U.S. Senate provision amending the Congressional Budget Act of 1974 to allow Senators, during the Reconciliation Process, to block legislation if it might significantly increase the federal deficit beyond a ten-year term. The rule limits the types of legislation that can be moved through Congress. Normally 60 votes are required in the 100-member Senate to bring debate to a close. The Senate’s reconciliation process, which allows for budget-related bills to be passed with a simple majority, was originally designed to pass difficult deficit-reducing bills that raised taxes and cut spending.

Over four decades ago then-Senate President pro tem Robert C. Byrd (D- West Virginia), one of the longest-serving senators in U.S. history (1959-2010), instigated the rule; it’s still enforced today.

What is triggering enactment of the Byrd Rule is inclusion in the proposed tax bill of the numerous revenue reduction measures promised by presidential candidate Trump and the Republicans – primarily elimination of the estate tax, reduction of the corporate rates and an end to the alternative minimum tax. A loss of tax revenue from these sources has been confirmed by the nonpartisan Committee for a Responsible Federal Budget. This will result in an increase in the federal deficit by 2028, thereby enabling the 48 Democrats in the Senate to prevent passage of legislation. It’s pretty well acknowledged no Democrat will vote for any tax bill the Republican majority might submit. The SALT deductibility controversy is the result of an attempt to offset these tax revenue declines.

A possible way the Republicans might sidestep this is a device, used in 2001 during the George W. Bush era, where major individual tax cuts were permitted to expire after 10 years. Such a ruse might not work this time, however, as the Joint Committee on Taxation ruled cutting the corporate tax rate might lead to lower federal revenue for several years afterward. As you see, the matter is becoming more complex and contrived with every ruling.

There’s yet another wrinkle in the tax reform fabric now causing controversy among factions within the Republican hierarchy. It’s an accusation party leaders are no longer embracing fiscal responsibility by their willingness to permit the federal deficit to grow ever larger.

In 2012, with the federal debt at $15 trillion, Congressman Paul Ryan, then House Budget Committee Chairman, warned the debt crisis would be catastrophic to the American way of life. He also called the crisis imminent, stating “All the experts are telling us we have about two or three years, it’s the time frame they tell us.”

During the Obama years conservatives continually warned of the coming fiscal apocalypse. They stoked their outrage over deficits and debt, even threatening to shut down the government. Now, five years later, with a national debt exceeding $20 trillion, House Speaker Ryan is pushing hard with tax cuts likely to increase the debt by trillions more. There’s no telling whether the Republican hard-liners may, at any time, abandon the tax modification package and permit it to fail.

If you’re paying attention, you understand tax reform to be one of America’s most contentious matters. You’ll not find a political aspirant who fails to remind the voter it’s an uppermost priority. So the question must be asked: If virtually everyone is in agreement it’s a must, why does the nation, year after year, continue to wallow in turmoil over every aspect of it? I think you know the reason. It’s from the difference of opinion over what constitutes reform. Depending upon whose opinion you solicit, there are adherents to every possibility.

This brings us to the crux of the matter. The definition of reform, specifying changes which foster economic or social benefits, omits the fundamental ingredient: benefits whom?  If you’re an employer who profits from minimal FICA deductions, you want as few Social Security withholdings as possible. If, instead, you’re marginally employed in a menial job at a salary just above minimum wage, you’ll favor any law providing a maximum earned tax credit.  And understandably, if you’re a slum landlord with vacant apartments to fill, you’ll welcome an increase in the Section 8 housing allowance.

The picture should be clear to any observant viewer. Tax reform is a concept with no objective meaning whatever. Each participant in the charade harbors a vested interest and will espouse whatever nonsense supports that interest. In short: For each of us, rationality be hanged; enact rules we find to our benefit.  It’s for this reason the battle over tax reform will go on forever.

Al Jacobs, a professional investor for nearly a half-century, issues a monthly newsletter in which he shares his financial knowledge and experience. You may view it on http://www.roadwaytoprosperity.com.

al@beachomber.news