Fundamental Tax Reform Is Mostly Dead—but Not Quite

By:
Curtis S. Dubay
Published Date:
Oct 1, 2016

In the classic children’s movie The Princess Bride, Billy Crystal plays a miracle-performing medicine man. When the hero of the story is brought to him, Crystal’s character says that he is “mostly dead.” That is an apt description of fundamental tax reform’s current state.

Fundamental tax reform would lower tax rates for families, businesses, investors, and entrepreneurs. It would better define the tax base so the Tax Code would not tax savings and investments multiple times, nor would it convey tax breaks on congressionally favored activities. With these improvements, tax reform would free the economy to grow stronger—and thereby raise the incomes of Americans at all levels.

Tax reform is just about dead because of the presidential candidates’ lack of serious attention to this crucial issue. U.S. businesses are the hardest hit: For the foreseeable future, they will continue to suffer under the worst business tax system in the developed world. The antiquated business tax system remains the biggest reason tax reform is badly needed.

There remains a slim hope that tax reform could come back from the being mostly dead. Before explaining the conditions that would revive it, it is necessary to look back and understand why tax reform all but completely died in the first place.

Just four years ago, during the 2012 campaign, tax reform was front and center in the presidential campaign. Governor Mitt Romney proposed a serious, well thought out tax reform plan—a plan that he clearly had been involved with crafting. While it had some glaring weaknesses, it would have been better than the current system had it became law, serving—at the very least—as a good starting place for Congress. 

Most importantly, for the prospects of passing tax reform, it was a plan that Romney stood behind, campaigned on, and would have brought with him into office had he won the election.

President Obama was less in favor of tax reform. He wanted to end the Bush tax cuts for the wealthy and raise taxes on them further; other than that, he did not favor changes on the individual side of the Code. He was, however, in favor of corporate tax reform, even putting out a corporate tax reform plan in early 2012. He did not put much political capital behind the plan, but the fact that he put the plan together showed corporate reform was at least on his agenda.

That both candidates showed seriousness about tax reform was crucial because it raised the issue in importance in voters’ eyes. This caused them to pay more attention to it, which raised the prospects of tax reform becoming a reality. Of course, it ultimately failed to come to fruition after the election, but that was due largely to other factors. It would have had even less chance of passage had it not been a part of the 2012 campaign.

Fast-forward to the present. One of the many ways that 2016 is unlike 2012 is the lack of prominence that tax reform has in the campaign. Donald Trump had a tax reform plan during the Republican primaries, and he has a new tax reform plan for the general election. He does not talk much about his plan—nor does it seem he put much thought into either iteration.

The first plan was unworkable. It cut taxes more than could be sustained and did so in a way that would have resulted in little economic growth compared to the high cost. Trump wisely changed the plan to be more workable. The second version is better but still needs improvement.

Hillary Clinton does not have a tax reform plan. She has an assortment of tax hikes on the rich, but even those hikes strung together do not resemble a tax reform plan. Her tax hikes include a new 4% surtax, a minimum 30% tax rate, and limiting itemized deductions for high earners, raising capital gains rates, and several other various tax increases.

On the business side, unlike President Obama, Clinton has no plan to fix the out-of-date system that is wreaking such havoc in the economy and also causing U.S. businesses to merge with foreign businesses and invert their headquarters abroad. Instead, Clinton would impose an exit tax on businesses that invert to escape the onerous U.S. system. An exit tax would be like a restaurant serving inedible food, but charging patrons for eating elsewhere, assuming they had the force of law to compel those patrons to pay.

The candidates’ lack of interest in tax reform means the issue has not been a major one during the campaign. This has reduced it in importance in the eyes of the public. It also means that tax reform is unlikely to be at the top of either candidates’ agendas when one of them assumes office next year.

This is why tax reform is dead. To be successful, tax reform requires energetic presidential involvement. He or she must sell the plan to the public and guide Congress through its lawmaking process. That leadership starts while the president is running for office—when he or she needs to start building the case to the American people about the importance of implementing a plan for tax reform.

Tax reform’s death is bad news for the U.S. economy, which badly needs the jolt tax reform could provide—not to mention the families that are in dire need of the raise that has eluded them for many years now.

As Crystal’s character points out after diagnosing the hero of The Princess Bride as being mostly dead, being mostly dead also means he is slightly alive. Tax reform too is slightly alive, which means there remains a slim hope for its revival. Two conditions exist for tax reform to potentially have a quick return to prominence.

The first condition is the continued commitment to tax reform from the House of Representatives. Before Congress left on its summer break in July, the House released an excellent blueprint of a tax reform plan. If the House follows through on it and writes a tax reform bill using that blueprint, the plan would be a major boon for the economy.

If Trump were to win, Congress could assume the policy imitative and lead him to support tax reform. This has already happened on a smaller scale: The second iteration of Trump’s plan moved his original plan to something that more closely resembles the House blueprint.

Whether that happens depends on Trump’s governing agenda and the House’s willingness to take the lead should it disagree with that agenda—or if Trump fails to offer an agenda of his own.

The House could similarly set the agenda if Clinton wins. If Republicans hold the Senate as well as the House, they will have to work with Clinton to move legislation. If the House puts tax reform at the top of its agenda, it could force Clinton to work with them to pass it. The end result will look different than what they have come up with—and will require the House passing parts of Clinton’s agenda—but the end result could be a tax system that is much better than the current one.

The second condition that could lead to tax reform is plain necessity. There is bipartisan consensus that business tax reform is a must. Inversions will continue without it, and U.S. businesses might simply allow themselves to be purchased outright by foreign firms if our business tax system is not modernized soon. Modernization would entail lowering the rate to at least 20% and moving away from the worldwide tax system to a territorial one. The necessity of making those changes will drive whoever is in the White House to the table.

In that case, it is likely a business-only tax reform plan could pass. The individual side would be left as is for the time being. This is the most plausible scenario, regardless of who wins in November.

It would have been better for tax reform and the country had the candidates made fundamental tax reform of the entire Code a more important part of their campaigns. Nevertheless, even though such sweeping tax reform is mostly dead, the seeds of its revival are already planted and ready to spring forth should events unfold in the right way. American families and businesses must hope that they do.

Do you agree with the author? Please let us know at taxstringer@nysscpa.org.

 

Dubay

Curtis S. Dubay is research fellow in tax and economic policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom and Opportunity at The Heritage Foundation. The views expressed in this article are the author’s alone and should not be construed as representing any official position of the Heritage Foundation. He can be contacted at curtis.dubay@heritage.org or 202-608-6230

 
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