Once again, the hue and cry of tax reform has become commonplace in contemporary political rhetoric. Among the major issues of the 2016 presidential campaign, the promise of tax reform looms large.
But is that assertion really true? Do candidates truly support meaningful reform? Or, is it more likely that support for tax reform, a popular notion, is simply included in the oft repeated sound-bites used by every candidate? Are individual candidates playing politics and, just as Captain Renault commanded in Casablanca, “round[ing] up the usual suspects.”
But, in politics just as in real life, broken promises are worse than lies. Promises don't just make one believe, they offer hope.
Let me be blunt. What has been presented thus far is a political potpourri, offering more and fewer tax credits and penalties, more and fewer tax brackets, higher and lower taxes, meant to perfume the pig that is the Internal Revenue Code. To demonstrate, let’s examine some of the more prominent proposals offered by the current candidates.
At this point in the campaign cycle, only a few of the candidates have either put forward a specific tax plan or have endorsed one already in the political arena. The purpose of this post is not to compare the pluses and minuses of each, but to assess what they collectively mean for real tax reform.
On the Democrat side, we have two (perhaps three shortly) viable choices among those seeking the Presidency. It should come as no surprise that both offer ways to increase taxes on the wealthy while lowering taxes, or so they say, on the middle class.
Bernie Sanders wants to, “work[ing] with you to reform the tax code in a way that protects the middle class, working families, and the most vulnerable while making sure that the wealthiest Americans and most profitable corporations pay their fair share.” Yep, all of the usual suspects!
Sanders helped draft a resolution closing tax loopholes that benefit the wealthy and large corporations. Sanders has offered specific proposals to:
- stop profitable Wall Street banks and corporations from avoiding paying U.S. taxes by sheltering profits in the Cayman Islands and other tax havens;
- establish a 0.03 percent Wall Street speculation fee on the sale of credit default swaps, derivatives, options, futures to curtail gambling on Wall Street;
- end tax breaks and subsidies for oil, gas and coal companies;
- tax carbon and methane emissions; and,
- tax capital gains and dividends of the wealthiest 2 % at the same rate as ordinary income.
Hillary Clinton says, “The convoluted and contradictory nature of the U.S. tax code demands reform. It has been almost 30 years since we overhauled the tax code.” She wants to “give hard working families tax relief and simplification.” Even more tired political cliches.
Included in her proposals is a requirement that wealthy taxpayers hold investments longer to get the full long-term capital gains tax benefit. Instead of one capital gains rate (as an aside, we don’t have one rate now) that kicks in after one year, her plan would create rates escalating from 24% to 36% for those who hold investments for at least two years, up to six years. Like many, Hillary supports an end to the carried interest rules that allow managers of some investment firms to turn compensation into tax favored capital gains. Sounds like real simplification to me.
She endorses the “Buffett tax” on very-high-income households, tax relief for small business but new taxes on multinationals that benefit from “overseas loopholes.” She has proposed a $1,500 tax credit for businesses that hire or train new workers. She embraced the New Markets Tax Credit and Empowerment Zones, two tax-based subsidy programs aimed at encouraging investment in low-income communities. These should make our tax code so simple...
Conversely, the Republican contest gives new meaning to the Grand Old Party. The GOP has enough contenders to hold a serious hoe-down. Sadly for some, however, only a few of those running have any meaningful chance.
Two of the lesser rans offer (or support) meaningful reform of our existing code. Mike Huckabee supports the Fair Tax Plan, a plan that actually repeals the Internal Revenue Code, and defunds the Internal Revenue Service. This plan proposes a tax on consumption, a national sales tax, rather than the current tax on income.
Similarly, Sen. Rand Paul has concluded that the tax code has grown so corrupt, complicated, and intrusive that it isn’t fixable. He states, simply, that we should just “Blow Up the Tax Code and Start Over.” You have likely seen his spoofs, either torching the code or feeding pages through a wood chipper. He has proposed that Congress repeal the entire IRS tax code and replace the marginal personal income tax, corporate income tax, payroll tax, estate and gift tax with a low, broad-based income tax of 14.5% on individuals and businesses.
Jeb Bush describes the tax code as a labyrinth, littered with thousands of special-interest giveaways, subsidies and other breaks favoring the wealthy and Washington insiders. He also believes that itemizing deductions leads to more complicated tax returns, and often result in taxpayers with similar incomes incurring dramatically different tax liabilities.
He has proposed a plan that lowers marginal tax rates and replaces the current marginal tax rate structure, which has seven different tax rates, including a top rate of 39.6 percent, with a streamlined system that has only three rates: 28 percent, 25 percent and 10 percent.
JEB intends to simplify the tax code by reducing loopholes, expanding the standard deduction, limiting above the line deductions, and reducing the need to itemize expenses. He also proposes to reform our business tax code, lowering our corporate tax rate to 20 percent
Donald Trump announced a comprehensive plan to reform and simplify the nation’s tax code that would lower rates for most Americans, eliminate inheritance taxes and jettison many deductions. In keeping with his style, Trump said, “It will be simple, it will be easy, it will be fair.” I know it already has my head spinning.
The plan would reduce the number of income tax brackets from seven to four—25%, 20%, 10%, and 0%. Trump said his plan would take 50% of current income tax filers—those earning less than $25,000 individually or $50,000 jointly—off the federal tax rolls. As an aside, most taxpayers that fall in these two categories already pay little or no federal income tax. His plan would eliminate the Alternative Minimum Tax, as well as many deductions and loopholes for the top two brackets, although he would retain the deductions for charity and mortgage interest.
Trump’s plan would also cut the corporate tax rate to a maximum of 15%, while allowing for a one-time 10% tax on repatriated dollars held by U.S. companies overseas. Trump said he would eliminate the deferral of taxes on corporate income earned overseas, while eliminating most corporate tax loophole—including the carried interest provision favored by hedge funds—in an effort to balance the plan.
Senator Rubio’s tax plan would make quite a few changes to the current code.
On the business side, his tax plan reduces the corporate income tax rate (and the tax rate for pass-through businesses) to 25 percent. Rubio’s business tax proposals allows businesses to fully deduct the cost of investments the year in which they incurred the expense.
However, Rubio suggests that we eliminate most business tax credits and many special deductions. His plan changes corporate taxation to a territorial tax system that would exempt active foreign income of U.S. corporations from domestic taxation.
On the individual side, Rubio’s plan would cut taxes for just about everyone. He reduces the number of tax brackets to two (15 percent and 35 percent) and eliminates nearly all itemized deductions. His plan would replace the standard deduction and personal exemption with a fully refundable personal credit and he proposes an increase in the Child Tax Credit to $2,500 per child.
While all candidates have argued our tax code is in dire need of reform, only two (Huckabee and Paul) truly support meaningful reform.
It seems clear to me that our politicians are in need of some remedial English. I offer the following definitions in order to assist them in their tax reform effort.
- Reform – make changes in something (typically a social, political, or economic institution or practice) in order to improve it; or, to change into an improved form or condition; or, to improve by removal of faults or abuses.
Leaving aside the Fair Tax and Senator Paul’s proposal, none of the suggestions meet any of these definitions. It is likely that many candidates confuse the word reform with “amend.”
- Amend – modify formally, as a legal document or legislative bill; or, alter, modify, rephrase, or add to or subtract from (a motion, bill, constitution; or, change some of the words and often the meaning of (a law, document, etc.)
On further reflection, it’s not clear to me that any of our potential future presidents believe amend is the appropriate word. It is even more likely they intend to “emend” our tax code.
- Emend – emend should be confined to textual alterations only.
But the truth is, as I suggested in my blog post last November 14, President and Congress have historically, and based on contemporary rhetoric, will continue for the foreseeable future, to merely tinker with our tax code. It’s easy and they get to repeat their favorite political platitudes.
- Tinker – attempt to repair or improve something in a casual or desultory way, often to no useful effect.
Yes, that’s the right word. That about sums it up. Washington is tinkering when they should be performing a complete overhaul.
- Overhaul – to dismantle and examine thoroughly for faults and make necessary repairs. There’s a word that truly expresses what needs to be done. Nonetheless, I won’t hold my breath.
I will give my readers one more word to consider: obfuscate.
- Obfuscate – render obscure, unclear, or unintelligible.
Our candidates will talk a good tax reform game. Care to guess what their words truly mean?
The bartender at my favorite watering hole has a liberal arts degree. Perhaps he can help me sort out these definitions over a few shots of good old American bourbon.