Tax reform: Don’t let the best be the enemy of the better

The tax plan announced by the House Ways and Means chairman is consistent with the June 2016 Better Way framework but falls short of all of its aspirations, especially in eliminating deductions and subsidies.

That was inevitable, as the legislative process involves trade-offs and compromises to obtain enough votes for passage. With slim majorities in the House and Senate, each member has greater leverage in seeking concessions.

{mosads}While the process that the House has gone through validates Otto von Bismarck’s observation that, “Laws are like sausages, it is better not to see them being made.” The end result is certainly better than the status quo.

The challenge is to minimize additional concessions in getting reform legislation passed. But, some changes are inevitable, as evidenced on Friday when Ways and Means changed the inflation adjustment for brackets to the “chained CPI,” which while lower is a more accurate measure of inflation.

Having it go into effect immediately, instead of 2023, will also lower estimates of lost revenue and give the House needed flexibility.

Clearly, the proposed changes in the tax code, assuming that other changes do not undermine what is in the basic proposal, will make the tax code simpler and more transparent. And while it is less than many hoped for, members of Congress should not let the best be the enemy of the better. 

Proposed changes related to corporations are a big plus that will increase domestic investment, create job growth and increase wages. Even reducing the corporate tax rate to 20 percent does nothing more than make the U.S. more competitive with other countries that already have rates well below the statutory 35 percent.

In addition, having a low rate for repatriation of over $2 trillion will provide a big boost to domestic spending and investment. Other provisions, such as immediate expensing, incentives to favor capital over borrowing and reducing subsidies will make decision making more efficient and less about gaming the system.

If the proposed provisions become law, the benefits from corporate tax reform will flow to shareholders, workers and consumers. 

The proposed changes in individual taxes take a big step toward simplification, although it probably won’t lead to being able to file tax returns on a postcard-sized form for most filers. The loss of deductions will not harm most taxpayers, as only 30 percent itemize deductions according to the Congressional Research Service (CRS).

While some may be able to file on a simplified form, others may be able to avoid the cost of having to hire an accountant because of tax code complexity.

The current code is over 74,000 pages in length, having grown from 60,000 pages in 2004. One goal should be to reduce it below that 2004 figure and set a long-term goal of returning to the 1984 level of 26,000 pages.

John Cochrane, a senior fellow at the Hoover Institute and former economics professor at the University of Chicago, made a strong case for lower rates in his Nov. 2 The Grumpy Economist blog.

He also made another important point: “You just can’t get significant rate reductions on a revenue neutral basis without really cutting the deductions, tax expenditures and with them much of the complexity and corruption of the code.” 

While the current proposal may fall short of what would be most desirable, Congress should be guided by Ronald Reagan’s 80-percent rule because the proposed changes are a big improvement over more debate with no reform.

William O’Keefe formerly served as CEO of the George C. Marshall Institute, a nonprofit conservative public policy institute.