Overhauling tax code means dealing with hypocrites — lots of them

The tax reform principles released last week by the White House have produced the typical reaction from Democrats, advocates of big government spending and those who can only think in static terms. 

Why is it that concern for the national debt and deficit spending only seems to take place when tax reform is on the table?  The most obvious answer is that those who prefer more taxes and government spending along with those who benefit from the current tax code resist change.

{mosads}If that was not the case, the initial reaction would be muted because a one-page list of principles is a far cry from a legislative package. The process of reforming the tax code is torturous, as was demonstrated in the tax reform of 1986. 

The corporate tax rate, even if it is not paid by most companies because of various deductions and tax preferences, is the highest in the developed world at 39 percent. Compare that to the global average of 22.5 percent. Public policy should be directed to encouraging investment here; not in other countries.

In an earlier piece for The Hill, Alan Viard of the American Enterprise Institute pointed out that, ”The distortions caused by the corporate income tax in today’s globalized economy are legion…Companies have an incentive to avoid U.S. tax by earning profits overseas…which makes American workers less productive and drives down their wages.”

A more competitive tax rate changes those incentives. Increased domestic investment boosts productivity, stimulates innovation and creates jobs.

Claiming the White House proposal is a tax cut for the rich is pure hypocrisy. Yardeni Research released an April 17 report — U.S. Economic Briefing: Income Taxes Paid by Income Level — that clearly shows the rich — those with incomes over $200,000 — already pay 53 percent of federal taxes. 

When the income level is expanded to include those over $100,000, the percentage jumps to 77 percent. That 77 percent represents the top-10 percent of income earners according to the National Taxpayer Union. The proposed reductions in personal tax rates are not going to seriously change that distribution or the fact that those who make the most carry the lion’s share of the burden for funding government. 

The exercise of “scoring” a tax proposal is an interesting macroeconomic exercise, but it should be taken with more than a few grains of salt. The economy is too complex and the future too uncertain to estimate future revenues with pinpoint accuracy. The bottom line is this: Who can spend the avoided taxes better and more efficiently, taxpayers or the federal government?

Rather than devoting so much energy to trashing an outline, members of Congress would serve the public interest better by making a commitment to making changes in entitlement programs, which account for two-thirds of federal spending — the largest source of deficits.

In addition, they should streamline the tax code to eliminate incentives for gaming the system and make it possible for most taxpayers to complete and file their own returns. Lastly, they should get rid of unnecessary spending because we are stuck with an out-of-date bureaucracy.

With control of the White House and Congress, Republicans have a once-in-a-generation opportunity to put our fiscal house in order. A bipartisan approach is preferable, but if partisan politics makes that impossible, Republicans should take two bold actions. 

First, pass comprehensive tax reform that makes us more competitive and streamlines the tax code. Next, set up two blue-ribbon commissions: one on executive branch organization and one on entitlements. The results would give a clearer picture of whether there is adequate revenue to fund the government that we need and want and not the government that “big government” advocates want us to have.

William O’Keefe is the founder of Solutions Consulting, which provides counseling on public policy, communication and organizational matters. Previously, O’Keefe was the CEO of the George C. Marshall Institute and the executive vice president of the American Petroleum Institute. 

The views expressed by contributors are their own and not the views of The Hill.