A Broadened Perspective on Tax Reform | Commentary
Consensus is an almost unheard of commodity today in Washington, and it’s not difficult to find confirmation of this fact. The 113th Congress has produced less than 100 bills that have been signed into law – an historically low level of output.
But despite the epidemic levels of discord among our nation’s lawmakers, one matter of the utmost importance does seem to have nearly unanimous conceptual support regardless of party: Washington’s brightest economic and political minds agreed many years ago that a wholesale reform of our tax code is urgently needed.
At its start, the 113th Congress was considered by many to be our best chance at comprehensive tax reform. But crisis after crisis – from the fiscal cliff to sequestration and government shutdown, and now the pending question of how to address an imminent shortfall in the nation’s crucial Highway Trust Fund – managed to divert legislative energy and political capital away from the herculean task of rewriting the tax code. Ironically, the very issues that may have doomed tax reform also helped to underscore budget and deficit concerns that have created the fundamental need for reform.
Despite the highest of hopes and the best of intentions, the prospects for passage of meaningful reform in the 113th Congress are slim to none. But that does not mean that the conversation should stop.
Even under the most idyllic of political conditions, reforming the tax code is messy business. While it’s easy to agree that something needs to be done, it is next to impossible to agree to the details of what needs to be done, and even harder to win the support of those that it will impact. It’s no surprise, then, that it can take many years – and many legislative sessions – to even begin to close in on a concept that will work.
Given the progress that has been made thus far, it is clear that additional time is needed to arrive at a model that will work.
Recent tax reform proposals, such as those offered by Ways and Means Chairman Dave Camp, R-Mich., former Senate Finance Committee Chairman Max Baucus, D-Mont., and new Finance Chairman Ron Wyden, D-Ore., all utilize a similar architecture. In keeping with the blueprint developed by the President’s Commission in 2010 under the leadership of former Senators Erskine Bowles and Alan Simpson, they seek to lower corporate rates by broadening the tax base, repealing current provisions, and using the resulting revenue to finance the reduced tax rate on income. The provisions targeted vary, as do aspects such as the treatment of international operations. But the concept at the heart of each proposal is consistent.
The problem inherent in this approach lies in the fact that the level of rate reduction achieved is unlikely to make up for the increased costs that would result from the loss of provisions such as Last In, First Out accounting, accelerated depreciation, the domestic production deduction, and a host of treatments important to capital intensive processes such as oil and gas extraction and manufacturing.
Recent research from Ernst & Young – commissioned by the American Council for Capital Formation – underscores this effect. According to their data, tax reform with the Bowles, Simpson foundation would increase the cost of capital for business by 3 percent.
Given the vital importance of new investment to our nation’s economic outlook – $1 billion in new investment has been associated with the creation of 20,000 new jobs over the last three decades – this is a fact that today’s tax writers must closely consider as they weigh the impact of their proposals on the ability of capital intensive industries to create job and support the gross domestic product.
A tax reform plan that incorporates the full expensing of new investment, the Ernst & Young research shows, actually reduces the cost of capital by 21 percent and would have a much stronger impact on investment and economic growth.
As we look back at the recent history of tax reform, and as we look ahead to its future, it’s clear that while conceptual consensus is easily attained, it is significantly harder to settle on the details of tax reform, or an effective mechanism through which it can be pursued.
Tax reform is a marathon, not a sprint. And while 2014 may not be the year that it crosses the finish line, it is vital that lawmakers continue the conversation and use this time to build a platform that effectively addresses the complexity and costliness of our current code.
A debate that considers all options rather than one baseline structure will be more fruitful, and will yield better results.
Dr. Margo Thorning serves as chief economist and senior vice president of the American Council for Capital Formation.