Taming the tax code beast
WASHINGTON — “Colleagues,” said the June 27 letter to 98 U.S. senators, “now it is your turn.” The letter’s authors are Max Baucus, D-Mont., and Orrin Hatch, R-Utah, the chairman and ranking Republican on the tax-writing Finance Committee, respectively. From their combined 71 years on Capitol Hill they know that their colleagues will tiptoe gingerly, if at all, onto the hazardous terrain of tax reform.
Together with Chairman Dave Camp, R-Mich., of the House Ways and Means Committee, Baucus and Hatch propose a “blank slate” approach, erasing all deductions and credits — currently worth more than $1 trillion a year — and requiring legislators to justify reviving them. Hence the Baucus-Hatch letter, in response to which almost 70 senators sent more than 1,000 pages of suggestions. Although some often were short on specificity, the submissions were given encrypted identification numbers and locked in a safe, as befits dangerous documents.
Every complexity in the 4 million-word tax code was created at the behest of a muscular interest group that tenaciously defends it. Which is why tax simplification would be political reform: Writing lucrative wrinkles into the code is one of the primary ways the political class confers favors. Furthermore, “targeted” tax cuts serve bossy government’s behavior modification agenda: Do what we want you to do and you can keep more of your money. Simplification would reduce the opportunities for the political class to throw its weight around. Hence the flinch from simplification.
In 1986, however, Congress did not flinch. In the last 40 years, Finance, the Senate’s most important committee, has had formidable chairmen — Russell Long, Bob Dole, Bob Packwood, Lloyd Bentsen, Pat Moynihan and Baucus. And in 1986 there were additional serious reformers, including Sen. Bill Bradley and Rep. Dick Gephardt.
Of the three biggest tax preferences, unions, especially, oppose taxing as compensation — which it obviously is — employer-paid health insurance (a $260 billion benefit), and Democrats oppose ending the $80 billion deduction for state and local taxes. It encourages high government spending.
The third preference, the mortgage-interest deduction, is a $70 billion benefit that goes disproportionately to affluent homeowners. But Australia, Canada and the United Kingdom, which have no mortgage-interest deduction, have homeownership rates comparable to America’s. Every congressional district, however, has real estate brokers benefiting from the bankers who benefit by providing mortgages.
Baucus is proud to have been mentored by the greatest Montanan, Mike Mansfield, a Democrat who for 16 of his 24 Senate years was majority leader. Today, the main impediment to tax reform, aside from Baucus’ risk-averse colleagues, is Majority Leader Harry Reid, who Baucus insists, emphatically but implausibly, is a friend. Reid, who is as petty as Mansfield was grand, deplores partisanship but resents Democrats like Baucus who practice bipartisanship. Reid says he did not even read the Baucus-Hatch letter, and insists tax reform “can’t be revenue neutral; it can’t be even close to neutral.”
Each year 6.1 billion hours are spent complying with the tax code. This is equal to the work time of 3 million full-time workers, making tax compliance one of America’s largest industries. Is there time for Congress to reduce this waste of time?
“It’s early,” says Baucus equably. Actually, it is late in this legislative year, and elections are next year. But, says Baucus serenely, 1986 was an election year in a president’s second term. He seems unperturbed about the possibility that Camp might be distracted by seeking Michigan’s open Senate seat. Baucus still hopes to bring Congress to an “all join hands and jump together” moment, “a tipping point where there is a sense of inevitability.”
Inevitably, however, the tax code has reached a critical mass of complexity that renders it almost unreformable. This illustrates the crisis of the regulatory state: Interest groups fasten themselves onto the government and immobilize it.
At the 2004 Republican convention, George W. Bush vowed to “simplify” the tax code’s “complicated mess.” The convention roared approval. Next, he promised new complexities — tax benefits for “opportunity zones” in depressed areas, a tax credit to encourage businesses to offer health savings accounts. Another roar of approval.
Since the 1986 simplification, the code has been re-complicated more than 15,000 times at the behest of Americans who simultaneously praise the principle of simplification. All other taxes could be abolished if we could tax the nation’s cognitive dissonance.