@TaxPolicyCenter once tweeted, “K Street has a message for President #Obama when it comes to #taxreform: Talk is cheap.” Taken literally, that is likely a true sentiment. However, given the history of tax reform since passage of the 16th Amendment, that message applies equally across the entire political spectrum.
While the tweet was directed at the President, and seems to be intended to encourage meaningful dialogue, the title I chose for this post is more pointedly directed at each of us. It is meant as a description of every American taxpayer, whether on Forbes 400 or standing in the local Human Services enrollment office.
The title is taken from the movie A Few Good Men. In the final courtroom scene, Lt Kaffee, played by Tom Cruise, conducts a contentious cross examination of Col Jessep, played by Jack Nicholson.
Near the end of this heated exchange, Col. Jessep turns the table by asking Lt. Kaffee a question.
Col. Jessep: You want answers?
Lt. Kaffee: I think I'm entitled to.
Jessup presses the point by repeating, almost shouting the question again.
Col. Jessep: *You want answers?*
Lt. Kaffe, with clenched fists, bellows his answer.
Lt. Kaffee: *I want the truth!*
Just before Jessup launches into a soliloquy on the military, he snarls a rebuttal to Kaffee.
Col. Jessep: *You can't handle the truth!*
I repeat this dialogue in order to interject some pragmatic reality into the debate on tax reform. American taxpayers can’t handle the truth. We want our individual beliefs accepted as truisms.
Many conservatives believe, if not outright espouse, that the problem with the tax code and with the government is the rise of social welfare. This problem is magnified, they hold, by the income redistribution that liberals have built into the tax code.
Conversely, many liberals believe that the problem is that the wealthiest among us aren’t paying their fair share. They contend that those earnings millions should pay much, much more in taxes.
Both sides voice criticism of the complexity of the tax code, condemning this or that tax preference, as long as that preference does not benefit their particular constituency.
These are simplistic arguments, but they appeal to the respective taxpayer base in each group. Although none of these assertions comprises the truth, each conveys an accurate message. Yet neither side wants to listen to the arguments of the other. Dare I say it? Neither group can “handle the truth.”
All agree that the current system is overly complex and often unfair. Members of Congress, presidents, presidential candidates, special committees appointed to review our tax code, everyone agrees. Our tax code is just plain wrong yet none step forward to truly address the problem. We discuss taxes and government spending by using the word ‘billions.’ We talk about quin-tiles of income distribution. In all of this noise, we forget we are talking about real people and the real impact on them, whether fair or unfair. We overlook the truth that Santayana offered, “…injustice in this world is not something comparative; the wrong is deep, clear, and absolute…”
What is it that is true about our tax code? Listed below are some of the macro problems resulting from our tax code. This list is in no way intended to be a comprehensive enumeration of the evils of our tax code.
First, our corporate tax rate mandates the highest tax in modern economies. Yes, it is also true that most companies do not pay the highest rate due to various tax preferences.
Our corporate income tax laws also subject income earned by U.S. Corporations to triple taxation. This is due in part to the “worldwide” characteristic of the tax code. Virtually every developed economy has elected not to employ this methodology. Corporate income is subject to U.S income tax even if earned abroad, even if that income is taxed by the host country. Yes, the corporation can claim a credit for that tax, but it is taxed yet again. Finally, when that income is distributed to owners, those dividends are taxed once more.
Companies attempt to act rationally in order to generate, indeed to maximize profits. It is therefore true that companies must consider tax ramifications to be equally important as marketing, operational and investment considerations. Economists have long asserted that investments made to minimize tax exposure tend to be less productive, and less beneficial to the economy, than those based purely on sound investment criteria.
Taken together, these statements create a conundrum. Hence, we find ourselves criticizing large corporations, even calling them economic traitors, rather than fixing the tax code.
Second, U.S. individual income tax laws have become so complex they are almost laughable. All agree on this point. Left, right and center, pundits and politicians, comedians and citizens – for over half a century, the issue of tax code complexity has been at the forefront of our collective political consciousness. Below are some examples.
“The way I look at this, we essentially have a tax system that's held together by chewing gum and chicken wire.” – Assistant Treasury Secretary for Tax Policy Pamela Olsen
“The most dangerous thing you can do to any businessman in America is to keep him in doubt, and to keep him guessing on what our tax policy is.” – Lyndon B Johnson
“The present tax load … distorts economic judgments and channels an undue amount of energy into efforts to avoid tax liabilities” – John Kennedy
“…allow Americans to file their tax returns without the help of a lawyer or accountant, or both…” – Robert Dole
Third, this complexity creates built-in, systematic inequality. Many taxpayers on the lower end of the income spectrum do not avail themselves of all available credits due to a lack of knowledge and inability to afford counsel. Many middle income taxpayers lose significant tax benefits due only to the luck of the draw – timing.
Fourth, inclusion of payroll taxes in the Internal Revenue Code as a significant part of the federal tax base, assessed only on earned income, and levied on total income below a wage base limit, makes overall federal taxes extraordinarily regressive. Middle income taxpayers, especially those with only earned wages, often pay the highest effective tax rates.
Finally, the tax code treats taxpayers with virtually the same income differently, sometimes remarkably so. This is due to the different tax treatment of different types of income, not just capital gains. Plato once warned us:
When there is an income tax, the just man will pay more and the unjust less on the same amount of income.
The wealthiest among us collectively pay the lion’s share of the total tax bill. But they do so while paying a lower percentage of their total income. As a result, the tax code allows their sizable wealth to grow at a faster pace than those less well off.
Liberals decry vertical equity because the wealthiest do not pay there fair share. Conservatives bemoan the fact that many pay no taxes at all, leading to vertical inequity. Neither side address the obvious, and often significant horizontal inequity created by our tax code.
The truth? Our tax code is completely unfair, but randomly so!
Returning to the tweet quoted earlier, I do not know if talk on tax reform is cheap as much as it is a deliberate attempt to obfuscate, to appeal to a political base while chastising other groups. It is language chosen to facilitate re-election, not to affect real tax reform!
Only American taxpayers can stop this nonsense. Only we can finally demand real, comprehensive reform. To do so, we must demand, and be willing to hear, you guessed it, the truth.
It would be nice if we could just get to the truth. In the song Honesty, Billy Joel sings, “Honesty is hardly ever heard, And mostly what I need from you.” Wouldn't it be refreshing if, just once, we heard the same truth from our elected officials that is required in a courtroom: the truth, the whole truth, and nothing but the truth?
The issue of tax reform has already inserted itself into the presidential campaign. I hope that the result of any discussions are not frustratingly similar to Joel’s warning:
But if you look for truthfulness
You might just as well be blind
The truth of the matter, I’m fed up! And I haven’t even eaten yet.
Okay then. In a while, crocodile!