The voices of Tax Policy Center's researchers and staff
Congress is rushing to rewrite the tax code before Christmas. True tax reform would be a wonderful present for America, but the current tax bills are deeply flawed, the product of a hasty and partisan process. Congress and the president should slow down and go back to the drawing board.
Compare what we are seeing now with the process that led to the landmark Tax Reform Act of 1986. It started in January 1984 when President Reagan directed his Treasury Department to put together a comprehensive tax reform plan that the Treasury would release later that year after the presidential election. While many dismissed this as an election-year gambit, nobody told the Treasury analysts who produced an epic three-volume proposal that justified the most sweeping reform in history. (I joined the Treasury staff midway through tax reform process.) A revised version reflecting input from the White House released in 1985 provided a comprehensive grounding for serious tax reform.
Prodded by the popular president and his staff’s excellent spadework, Congress began to consider every aspect of the tax code and various reform options. The House held 30 hearings and spent 26 days marking up legislation in committee. The Senate held 36 more hearings in 1985 and 1986. The Senate debate in June 1986 lasted a full month. The ultimate bill passed with broad bipartisan support and President Reagan signed it on October 22, 1986—almost two years after Treasury released its initial plan.
Fast forward to 2017. There have been zero hearings to consider H.R. 1, the Tax Cuts and Jobs Act (TCJA). Treasury’s contribution to the debate was a one page set of bullet points released to great fanfare in April followed by a hardly more detailed “Unified Framework” in September. The Treasury Secretary dismissed his own staff’s analysis of key elements of the plan.
The House passed a 448-page bill on November 16 after a mere two weeks of deliberations. The Senate also skipped hearings on the TCJA (although they did hold three hearings on broad issues in anticipation of a tax reform push). Finance Committee Chair Orrin Hatch (R-UT) introduced a “conceptual mark” (no legislative language) on November 9 and the panel approved a 515-page amended bill 8 days later. GOP leaders hope the full Senate will pass the bill this week.
So far, no Democrat in either the House or the Senate has voted for the bill.
This partisan, helter-skelter process has produced deeply flawed legislation. Some defects are already apparent, but others may not emerge until after President Trump signs the bill into law.
For example, the bill aims to encourage unincorporated businesses by granting them a lower tax rate. Kansas tried something similar in 2012. It turned out to be a costly, regressive loophole that did nothing to spur entrepreneurship or economic growth in the state. It has since been reversed.
The Senate bill tries to limit the loophole, but my Tax Policy Center colleague Joe Rosenberg pointed out that the limit is so poorly designed that it effectively creates a new 65 percent marginal tax rate for higher income doctors, lawyers, and other service professionals. This will discourage work and encourage tax sheltering. It certainly isn’t tax reform.
Our corporate income tax has high rates and encourages American multinational companies to stash cash in overseas affiliates. But Reed College economics professor Kim Clausing argues that the TCJA is so poorly designed that it could encourage companies to move more factories and jobs abroad.
And because Congress is in such a rush, neither chamber is waiting for an assessment of the macroeconomic effects of the TCJA from the Joint Committee on Taxation, even though economic growth and job creation are the key rationales for the bill. Outside analysts, including the Tax Policy Center, have found that the bills would produce only modest economic benefits that wane over time as the national debt grows.
“What would Ronald Reagan do?” I think he’d take the time to lay out a comprehensive plan fully vetted by his Treasury Department. He’d urge Congress to hold hearings on all the major changes and their effects on the economy. And he’d work his charm on Congress to get bipartisan buy-in.
President Reagan used his position to enact a durable tax reform. It took time and a lot of hard work. President Trump and Congress think they can do it much, much faster with very little deliberation or debate. They might be able to pass something that way, but it won’t be reform and it won’t last.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Bob Daugherty, File/AP Photo