Why Good Tax Reform is Difficult

The best tax systems include low rates, a wide base and limited exemptions that minimize the distortions caused by policy, while easing the burdens of paying the tax.

But many of the provisions that make the tax code so complicated are advocated for, and relied upon, by a variety of special interest groups, meaning changing the system is extremely difficult.

But that's what Congressman Dave Camp, R-Midland, is trying to do. The chair of the House Ways and Means Committee has introduced a plan that would overhaul the tax system.

U.S. Rep. Camp The plan appears to generally lower rates and expand the base of filers while eliminating or limiting many credits, like deductions for education and housing loans, breaks for state and local taxes, subsidies for ethanol, and write-offs related to oil and gas fuels. The number of individual tax rates is dropped to just three: 10 percent, 25 percent and 35 percent (for a very small number of people). The plan deserves more scrutiny and a fuller description can be found here.

But eliminating exemptions means interest groups that receive those special deals are working hard to retain them. An article from the Associated Press features a series of quotes from those who want to keep their tax breaks:

American Fuel & Petrochemical Manufacturers President Charles T. Drevna also thought the proposal needed revising. "Although Chairman Camp's intent was to make the tax code tax simpler and fairer and to level the playing field, he unfortunately missed the mark. To date, the tax reform debate has been fixated on a one-size-fits-all approach of lowering the corporate rate to a certain percentage across the board, while eliminating various existing deductions. We urge Congress to take a comprehensive look at how different tax structures impact different sectors of the economy and use such analysis to develop a comprehensive tax reform." Ray Gaesser, Iowa farmer and American Soybean Association president, issued the following statement: "The farmers of the American Soybean Association commend Chairman Camp for his willingness to tackle the difficult task of tax reform. ... We are significantly concerned, however, in the proposal's elimination of the biodiesel tax credit. … ASA believes the biodiesel tax credit is worthy of extension given the many benefits it provides, including support for jobs, economic development in rural communities, diversity in our energy sources, and reduction in greenhouse gas emissions, among others."

Sen. Chuck Schumer, D-NY, said, "Any proposal that eliminates the deduction for state and local taxes, as the Republican plan would do, is dead on arrival."

The National Association of Realtors issued a statement saying it "supports reforms promoting economic growth, but we strongly oppose altering the rules that govern ownership and investment." That particular embrace of the general and rejection of the specific was a reaction to Camp calling for a reduction in the home mortgage tax deduction, part of his overall plan to reduce or eliminate some breaks in exchange for lowering rates for all.

Clarence Anthony, executive director of the National League of Cities, said Congressman Camp's work was well-intentioned, but added: "It will reduce cities' ability to promote construction jobs and build the foundations for future growth. Municipal and private activity bonds are used to build schools, roads, bridges, hospitals, and develop blighted areas of the community."

Part of the economic theory of public choice explains how interest groups have an oversized influence on the political process. In sum, as I have noted in the past, "When a small segment stands to benefit greatly from some policy, it will fight much harder for it than the larger segment that is harmed will lobby against it since the harm is either hidden or so small that it is not rational for the individuals making up the larger segment to spend a lot of time fighting the policy."

A few years ago, the state of Michigan passed a significant change to its tax system. As in Washington, D.C., the incentive was to chip away at the simplicity by adding more special deductions rather than lowering rates further, which is what the fight is about right now.

Principled citizens who want the best overall government should work to hold the line or further simplify the tax system.

Simplifying the tax code will only increase, greatly, the number of persons on the dole. Think of the 10’s of thousands of people who will be out of work.
So, a base tax of say 10 or 15 percent sounds good at the outset. But, then is will have to be increased to 20 or 30 percent to pay for all those new welfare recipients.

The number on government assistance is high because the current mess of a tax code promotes it. I’d say it has the opposite effect. If you could cancel the current system completely and replace it with an improved one, the numbers of assistance would plummet. The current system encourages dependency. We’d be better with a society that encourages work and reduces reliance on government.

Today, it’s too easy to play class warfare and get votes by having ‘someone else’ pay for it. If a bigger government means a higher tax rate for each individual, all of a sudden we see different voting patterns. States already operate much more this way where sale and property taxes affect everyone. We see a lot more Republican governors in states like Wisconsin, New Jersey, New York, Michigan, and Pennsylvania because voters own interests are often met by a lower tax burden and more retrained government. At the Federal level, it’s completely different...and those states mentioned rarely if ever vote for the Republican candidate offering better fiscal policy.

This is largely a pipe dram because I don’t ever see getting massive reform of the Federal tax code...there are too many grubby hands in the pot.

The day the Senate passed “comprehensive Immigration reform”. Two of its supporters Baucus and Hatch announced comprehensive “corporate tax reform.” Some of this is the payoff by the Dem's for supporting amnesty and making their partydominanant by diminishing the traditional middle class. Any way the GOPe needs to be taught a lesson about stabbing us in the back. Opposing their tax schemes that lower their taxes should be strongly considered.

Taxes are not primarily about revenue. Taxes are primarily about control.

The more confusing, convoluted and unfair a taxation system is, the more power it yields to lawmakers.

Therefore, the only kind of tax "reform" we will ever see is "reform" that makes taxes more confusing, convoluted and unfair.

best tax systems include low rates

Tax reform is difficult because 1/2 the country doesn't believe this. And it's in the democrat's interest to keep them from believing this. The biggest evil is not regressive taxes, or the fact that the tax burden of the poor & middle class should be lowered. The biggest evil is that tax rates are too low for "the rich" - and for a significant percent, tax rates on "the rich" will be too low as long as there is a group they consider to be "rich".

And, most who believe that also believe that there is no way the evil rich corporations/ceos will pass higher taxes on to consumers. The single positive thing about the rich is that they will gladly accept any increase in tax rates and not change their spending or investment habits and will not pass taxes to consumers.

I've even tricked liberals into arguing that "offshore tax havens" are a myth and that there's no need to be concerned with bringing foreign profits home because nobody would choose to invest overseas rather than home (at least not for tax purposes). Surprisingly, posting a URL to what they said last week arguing the opposite usually ends the discussion (surprising because I expect the discussion to turn to name-calling but they usually just shut up rather than moving to personal attacks)

The current system encourages dependency. We’d be better with a society that encourages work and reduces reliance on government.
This is largely a pipe dram because I don’t ever see getting massive reform of the Federal tax code...there are too many grubby hands in the pot.
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I agree with all you say. Unfortunately there are too many today that are dependent on the candy, which includes what is probably the largest sector of the workforce, government employees.
So, taking away the candy will leave all of them high and dry. The odds of creating that many jobs to cover them all is highly unlikely. Besides, I would bet that a huge number of them would rather take what they need rather than work for it as they have been conditioned to believe that it is normal to do so.
Basically, I don’t see a way out of this mess. It is too far gone.

Basically, I don’t see a way out of this mess. It is too far gone.

I generally feel this way too. I think we have likely reached that tipping point, or are very close to it...and too close to reverse course enough to save it. Wholesale replacement of the tax system seems all but impossible. between the class warfare on the left and the business/special interest influence on both sides, I don't see how it's possible.

I am not one to give up, though. Anything we can do to move the ball back in the right direction is a good thing.

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