Paths to Tax Reform

The Republicans have two basic options. They can go for expediency, raising the deficit in the short-term for tax cuts, avoid stepping on any toes, or they can go for real reform that involves dealing with blowback from special interests and being fiscally responsible. It’s a hard choice. The early signal is they will go for the coward’s cut, since they are seeking to use reconciliation and not starting from a place of bipartisanship. It’s the route used under President George W. Bush, which is why his tax cuts expired. But let’s say they want to go the responsible route, instead. How do you deal with the real estate lobby that will count the sitting president among its members? Or the carbon fuel lobbies that will want to keep their own favorite tax toys? Or pharma? One way, maybe the easiest, is to reduce all of their loopholes equally. If they all get a haircut, it’s hard for any one of them to claim they were singled out. And the stock reply to their wailing becomes, “We did it across the board, fellas. Suck it up. Walk it off.” Now, some of those groups may find pressure points to lean on, but if they are all pushing at once, it’s possible that they create a keystone arch of pressure, all pushing against each other, and leaving a pocket that allows the thing to pass. The weak point, they keystone, would be the president, who would probably cave on real estate treatment, and the arch would collapse. Another option would be a sort of parametric tax code. Basically, you would formulate a point system based on size of business (gross revenue, number of employees, etc.) among other factors. Then the business can spread their points among various tax strategies as they see fit. Some might have more points in capital investment, while others might have more points in employee perquisites. But the overall deductible income would be minimized, and the tax code could be modified not only to strengthen or weaken the areas of deduction, but to increase or decrease the points available.

We really do need tax reform, and if the Republicans would take it seriously they could do a lot of good. Nobody expects them to set the rates high enough, but that’s the beauty of the tax code: the Democrats or future generations can always increase the rates to a responsible level. Right now, it’s more important to see the code simplified, even if it means the rates aren’t right.

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