Wednesday, November 15, 2017

Tax Bill If Passed Will Fall Very Short On Promises

The Trumped Up Tax Plan Over Promises
The whole idea of Washington passing a tax bill that addresses and cleans up some of the gargantuan mess we call a tax code should be looked upon with skepticism. It is quite naive to think legislators polarized and unable to agree upon anything can tackle an issue as complex and divisive as tax reform. Even more outrageous is the idea they can do it quickly. A huge number of issues such as whether to exclude state and local taxes (SALT) remain explosive. As of Tuesday morning lawmakers had submitted some 355 amendments, so much for fast and simple. If anything does come out of all their promises we should have very low expectations as to the quality of reform and whether it will really benefit our country over time by stimulating economic growth.

People often forget that nothing influences and shapes the economy as much as how we are taxed. Tax laws and legislation are one of the strongest forms of social engineering and have massive ramifications that shape how people handle their financial affairs. Sadly tax incentives and the fuzzy math that surrounds them often allow our gutless lawmakers and politicians to take us down the wrong path. It should be pointed out that a consumption tax based solely on "goods" purchased would free many small businesses and labor markets from the distortion our current system causes and at the same time encourage savings. America’s lack of savings is repeatedly pointed to as a problem, yet we tax small savings accounts making them a non-starter.

The Gargantuan Mess We Call Our Tax Code
Like many people, I find it difficult to believe much of the news that flows out of Washington or the words of our politicians. A bit of research shows the Committee for a Responsible Federal Budget a nonpartisan, non-profit organization committed to educating the public on issues with significant fiscal policy impact points out that even a $1.5 trillion increase to over what the debt was projected to increase over the next ten years amounts to almost $12,000 per household and that this is a steep price that we will be passing on to our children. It should be noted that as the national debt doubled and soared by almost ten trillion dollars during the eight years Obama was in office. This means currently the national debt is far higher than anyone projected just decades ago.

What happened to the more reasonable approach where tax reform and a tax cut were two separate items? It is far more intelligent to look at tax reform as a revenue-neutral way to simplify our massively complex tax code. Corporate and individual rates are two separate animals but how they flow and intersect ties them together. Everyone agrees dropping many of the tax breaks built the code over the years would make it fairer and allow overall corporate rates to fall. It is difficult to understand how many large companies doing business in America pay no taxes or why they can save huge amounts of taxes by offshoring their main corporate office and where they claim to be located.

The Chained CPI Understates Inflation
The worst part of the new tax bill according to former congressman Ron Paul is that it adopts the chained consumer price index. The chained CPI is a way of measuring CPI that understates inflation’s effects on our standard of living. Chained CPI increases the inflation tax which may be the worst of all taxes because it is hidden and regressive. The inflation tax is not even a tax on real wages but rather a tax on the illusionary gains in income caused by inflation. The use of chained CPI to adjust tax brackets is designed to push individuals into higher tax brackets over time. So much for the promise of a middle-class tax cut. When looking past the illusion conjured up to garner public support, we get nothing except more debt.

The ugly fact is that tax reform or no tax reform, America is on course to rapidly expand its national debt in coming years. Starting in 2017 entitlements were, and are slated to expand to a point where they blow a massive hole through our budget. Deficit spending which has become a way of life has grown regardless of which political party is in power. In the race to bury our heads in the sand, Washington has lead the way and anyone who thinks after the failed promises to deliver quality healthcare at a reasonable price they are going to be able to churn out a fair tax reform package most likely also believes in unicorns.

Two last things to ponder, first, with tax reform in the news I came across an interesting comment which caused me to think about the psychology of taxation. The comment read; Removing more income earners from the tax rolls only reinforces the 'let the rich pay' perversion.  In the end, this takes us further from individual responsibility and of course the intent of the Constitution. I interpret this to mean that if fewer people actually have skin in the game it could result in far less concern going forward for keeping spending in check. In some ways, the writer may have a point and this could unleash more spending and take the social friction of inequality to new levels. The second problem I see with quickly passing a bill that leaves computing the taxes we owe a complex drag on so many Americans is that it will put true reform on the back burner for many years.

1 comment:

  1. Good article, Bruce. Never understand the Republican idea to reform the tax code and cut taxes in the same bill. Moreover, a shift to a consumption tax cuts through the social engineering aspects of all the special interest groups that have been written into the current tax law. One create a proportion consumption tax that is still progressive been excluding, say, the first $10,000 dollars of consumption. That way all tax payers have some skin in the game. It can also be revenue neutral by adjusting the proportional tax rate. Unfortunately Republicans are too dumb to think in such terms.

    Jerry Saylor