Taxpayers may have to wait a little longer for Congress and President Donald Trump to begin work on federal tax reform, because other policy agenda items are consuming more time and effort than expected, according to media reports.
A May 8 article by Axios political reporter Mike Allen reported congressional leaders are becoming pessimistic about the timetable for negotiating a tax reform bill with the president, after the health care reform bill, the American Health Care Act, did not speed through the House of Representatives as rapidly as White House strategists had expected.
In April, U.S. Secretary of the Treasury Steven Mnuchin told Financial Times reporters earlier predictions of writing, passing, and signing a tax reform bill by August were “highly aggressive to not realistic at this point.”
“It is fair to say it is probably delayed a bit because of the healthcare,” Mnuchin wrote to reporters.
No Easy Task
David Burton, a senior fellow in economic policy with The Heritage Foundation, says reforming the federal tax code will necessarily take a long time.
“Anybody who thought tax reform was going to be easy hasn’t really been paying attention,” Burton said. “It’s going to take a lot of work. It’s going to take presidential leadership. It’s going to take a major effort by leadership in the House and Senate. Then, they’re going to have to try to piece together a majority for pro-growth tax reform.”
Reforms Delayed, Recovery Deferred
Delaying tax reform means postponing economic recovery, says Burton.
“In principle, if you do major tax reform along the lines of what President Trump and the House leadership are discussing, you could see GDP gains of 10 percent over a decade, which is an extra [percentage point] per year, for 10 years,” Burton said. “That would mean a great deal to the average American. Delay means that we stay in this very tepid recovery, as opposed to robust economic growth.”
Whatever reform plan lawmakers craft should incentivize hard work and earning money, Burton says.
“You want to encourage economic activity,” Burton said. “Stated differently, you want to reduce disincentives to save, work, invest, and produce things in the United States. That means reducing marginal tax rates, getting rid of tax preferences that distort the economy, not artificially raising the cost of investment, [and] making U.S.-based international businesses more competitive. There are lots of different pieces.”
Cost-Benefit Analysis
Dan Johnson, executive director of the Tax Revolution Institute, says the nation’s tax system is broken because government’s costs exceed the benefits it provides taxpayers.
“Just look at the numbers,” Johnson said. “When you add the $1 trillion per year cost of compliance, Americans pay over half—50.71 percent—of their hard-earned money into the local, state, and federal tax systems. What do we get back? Special interests have taken over the tax code and our economy. The code itself is thousands of pages, and court rulings, regulations, and the law all contradict each other, landing otherwise innocent taxpayers in jail for nothing other than failing to understand the tax code.”
Too Many Captains
Reforming taxes is difficult because so many lawmakers disagree on what tax reform should do, Johnson says.
“The tax system is like a boat with 500 captains, and none of them can agree on where the ship needs to go, let alone how to get there, so it just stays still,” Johnson said. “Members of Congress want to deliver benefits to their constituents. The tax code is the easiest way to do it.”
Tax reform is also difficult because lawmakers have strong incentives to maintain the status quo, Johnson says.
“Don’t think of tax reform like health care reform, or welfare reform, or reform in any single policy domain,” Johnson said. “Think of it as an attempt to change a tool that lawmakers want to keep as it is, because of what it allows them to get away with. ‘Tax reform’ would mean asking Congress to throw out or seriously weaken the one lawmaking tool that they can reliably exploit to get reelected.”
