Presidential Elections and the Tax Reform Game

The next Presidential election is more than 15 months away, but it is already clear that one of the key economic issues will be tax reform.

Several announced candidates have set forth their proposals to change the federal income tax and in some cases, even the payroll taxes that fund Medicare and Social Security.

It is much too early to dissect any of these proposals in detail, but 6 important realities should be kept in mind as these proposals are made.

First, tax reform is a perennial election issue for the simple reason that no one likes the current system. Regardless of one’s political philosophy or views about the proper role of government, no politician has ever been elected by saying that the tax system is fine the way it is.

Second, tax reform is always an appealing issue because the majority of Americans believe the system is unnecessarily complex and that they personally pay too much. These twin issues of complexity and excess burden are actually inter-connected. The tax system’s lack of transparency allows people to surmise that some of their fellow citizens must be getting a better deal at their expense.

Third, there are very few new ideas in the area of tax reform. Do you believe that the tax system should uphold family values, promote economic growth, or encourage personal savings? Well, the tax law does all of those things already, to some degree. A candidate can certainly suggest tweaks to change the current policy emphasis, but those are minor alterations, not fundamental change.

Fourth, the real source of tax complexity is not the number of tax rates, but what is included in the taxable base. Computers have largely eliminated the arithmetic difficulty associated with tax determination. The real battle is over what is included in taxable income and what can be deducted from that amount.

Fifth, revenue trade-offs are real. If one category of people gets a tax cut, some other category must pay more. Everyone cannot have lower taxes without the government taking in less money. If a candidate wants to cut everyone’s taxes, that person should tell us which government spending programs will be reduced to offset the revenue lost.

Finally, no President can change the tax system without getting majorities in Congress to go along. Presidents can certainly champion tax reform as an important objective, but ultimately, the House of Representatives and the Senate can modify, or even delete, any proposal that a President makes. As the old saying goes, “The President proposes, but Congress disposes.”

Bottom line: as tax reform is discussed over the next 15 months, the details are less important than what those proposals say about a candidate’s general outlook and approach to government.

This is Richard Kaplan.