Taxes and Politics: Why Nothing Ever Happens With Tax Reform
As we head into the primary season early next year for the 2016 race for the Presidency, tax reform will surely be a hotly debated topic among the candidates. Thus far in the race, some candidates have stressed taxes more than others. However, each candidate’s position on taxes and tax reform will be closely scrutinized as we get closer to the nominating conventions next summer.
At this point in the campaign cycle, however, it’s worth pointing out that taxes and tax reform are always hotly debated topics in Presidential campaigns. But when is the last time that serious tax reform actually took place? We have to go back nearly 30 years to the Tax Reform Act (TRA) of 1986.
While President Reagan generally gets credit for this major tax reform package, the bill was actually sponsored by two Democrats: Richard Gephardt of Missouri in the House of Representatives and Bill Bradley of New Jersey in the Senate. TRA drastically reduced the number of deductions and individual tax brackets and lowered the top individual tax rate from 50% to 28%.
A Political Weapon
So why is tax reform such an often debated but rarely acted upon political topic? There are several reasons, not the least of which is the fact that politicians like to use taxes as a political weapon.
Many people on both the right and the left can get very passionate when it comes to taxes. In general, those on the right want to see a greatly simplified tax code or even a flat tax (like the Fair Tax, for example) and for taxes to be lowered on businesses and high earners in order to stimulate economic growth.
Most of those on the left, meanwhile, want to see the overall tax burden lowered (or even eliminated) for those at the bottom of the wage scale in the name of fairness. They generally do not believe that lowering taxes on businesses and high earners results in economic growth — instead, they tend to feel that businesses and high earners aren’t paying their fair share and should be taxed even more.
So guess what? Republican candidates beat the tax simplification and flat tax drum in order to appeal to their base, while Democrats beat the tax fairness and tax the rich drum to appeal to their base. Once the Republican and Democratic nominees have been chosen, they may then attempt to move to the center with their tax proposal and message in order to appeal to the undecided voters who usually decide Presidential elections.
After a President is elected, of course, he or she must try to gain consensus among a fractured and highly partisan Congress for his or her tax plans. It has been nearly 30 years since President Reagan was able to do this — and based on the highly partisan environment in Washington, it might be another 30 years or longer before it happens again.
Lobbyists, Complexity and Math 101
Another reason why nothing ever seems to get done with tax reform is the tremendous influence that lobbyists have on tax legislation. When it comes to taxes, many businesses and industries have a vested interest in maintaining the status quo — regardless of how complicated and dysfunctional the current tax system is. And they employ an army of lobbyists to try to influence legislators not to pass any sort of comprehensive tax reform legislation.
Still another factor in tax reform inertia is the sheer complexity of the current tax code. Ironically, this complexity makes it exponentially more difficult to do anything legislatively to simplify things.
This is one reason why tax simplification plans like Carly Fiorina’s recently announced three-page tax code will never happen. While this sounds nice in theory, especially to those who want to see serious tax law simplification, it’s simply not practical to condense the nearly 5,300 pages of the Internal Revenue Code (IRC) down to just three pages.
Also consider the fact that many candidates’ tax proposals simply don’t add up. It’s easy for a politician to tout a tax reform and simplification plan while out on the political stump by stressing components that appeal to his or her base. But many (if not most) of these plans fall far short of Mathematics 101 when they are carefully scrutinized by independent, non-partisan budget and tax analysts.
How Tax Laws Are Passed
Finally, one often overlooked reason why meaningful tax reform never happens is that the President actually has a very limited impact on tax law. Tax legislation originates in Congress, usually in the House Ways and Means Committee. From here, tax bills must travel a byzantine labyrinth through both houses of Congress. Only if a tax bill survives this gauntlet does it reach the President for his or her signature or rejection.
This is something to keep in mind as the Presidential candidates discuss their tax reform plans in the coming months. Whoever is elected President will have to rely on Congress to actually introduce and pass tax reform legislation.
Therefore, if you truly want to see meaningful tax reform during the next President’s term, you might want to focus less on the details of a candidate’s tax plans and more on the ability of a candidate to build consensus among a deeply fractured Congress. Ronald Reagan was the last President to accomplish this.
So the question is this: Is one of the current candidates capable of duplicating this feat three decades later? If not, it will likely be at least another one or two Presidential cycles before serious tax reform becomes a reality instead of just a political talking point and weapon.