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It is hard to find anyone who thinks that the elimination of loopholes, credits and deductions from the corporate tax code, which would force corporations to pay higher taxes than they currently pay is a bad idea
Almost everyone favors “tax reform” in the abstract: Broaden the tax base by reducing deductions, credits and other tax breaks; and then cut top tax rates.
But this sort of sweeping tax reform is usually a political nonstarter, and if you want to understand why, take a look at the tax proposals in President Barack Obama’s State of the Union address.
The president is advocating doing exactly the opposite; he wants to add exceptions, loopholes, incentives and deductions to the tax code in order to entice a specific group of businesses to do what he wants then to do.
His recommendations include: a new corporate tax credit to subsidize moving jobs from abroad back to the United States; a tax credit for companies locating in communities that were “hit hard when a factory left town”; extension of “temporary” tax credits to promote U.S.-produced windmills and solar panels.
These are precisely the special breaks that complicate the tax code and push up top rates. Manipulating taxes to favor or disfavor particular industries, groups or regions is a source of power that Democrats and Republicans alike are loath to surrender. That’s why major tax reform fails, despite routine endorsements from both parties
Once again we have a politician (in this case the president) manipulating the message of “tax reform” to serve his current political needs, rather than really reforming the tax code.
Take the “manufacturing communities tax credit.” It would benefit companies investing in communities “when a military base closes or a major employer closes or substantially reduces a facility or operating unit, resulting in a permanent mass layoff.” But how would this be defined? Would it be a fixed number (say, 1,000) or a share of the local labor force (say, 5 percent)? Could companies already in a location receive the credit if they simply expanded? By how much?
“It just invites lobbying (over detailed language),” says Gary Hufbauer of the Peterson Institute, a tax expert and former top Treasury official. “These proposals are a gift to K Street. They won’t lead to reform.”
So in fact the tax code would get more complicated, would offer more avenues for special interest lobbying efforts and would create as many problems as some say it will solve.
Another critic is economist Bruce Bartlett, author of The Benefit and the Burden: Tax Reform, Why We Need It and What It Will Take . Bartlett’s book is a clear and comprehensive overview of today’s complicated tax system. Reform’s main purpose, he argues, is to minimize how much taxes distort behavior.
“Let businesses and families make economic decisions without being biased or even pressured to do one thing rather than another, such as buy rather than rent a home, just because the tax system makes it worthwhile,” he writes.
We need tax code reform, not more gimmicks for the influential to exploit and for politicians to sell to their supporters for votes and donations.
It’s easy to imagine a better income tax. The top rate would be no higher than 30 percent. There would be no special rate for capital gains. Most tax breaks, including the deductions for mortgage interest and charitable contributions, would be eliminated or reduced. Don’t hold your breath. Tax simplicity sounds good, but, politically, complexity wins hands down.
A one or two page tax form and a few pages of instructions to replace the hundreds of thousands of pages of the tax code we now have.
Unlikely, but one can dream.
Your comments, counterpoints and remarks are welcome and appreciated.
