A Fairer Tax Code Is a More Efficient Tax Code

Tax formThe last time we saw comprehensive tax reform in this country was also the last time UCLA won a Rose Bowl (1986), so we are talking about a long, long time. We know there have been several tax cuts, and tax increases, since then, but as for some legislative attempt to drive a change in the overall system of tax policy in this country, it has not happened in over 30 years. It would be easy to argue that partisan polarization is the cause of this legislative difficulty, but that would be inaccurate. Partisanship did not keep welfare reform or comprehensive trade agreements from being done in the 1990s. Partisanship did not keep significant national-security endeavors from passing in the 2000s. And President Obama’s reelection in 2012 coincided with the sunsetting of the George W. Bush tax cuts, creating one of the more bipartisan agreements in recent history, when Vice President Biden and Senate majority leader McConnell negotiated a permanent extension of the tax cuts that resulted in more favorable treatment for investment tax and estate tax and left the individual rates at the lower levels of the Bush plan, besides at the top rate. Bottom line: Partisans have done plenty of bipartisan work over the last 30 years; they just haven’t done it when it comes to reforming something that is broken.

The term tax reform is pivotal here. Tax cuts scream for people who pay too much in taxes wanting to pay less (fair enough). Tax reform implies something is structurally unfair, and therefore needing reformation. We do not need to reform that which is already good and right. Sure, we may turn a knob here and there on levels, but reform is more comprehensive, and more reactive. The catalyst to reforming something is admitting something needs to be reformed.

The catalyst for 2017/18 tax reform is a broken tax code, and that brokenness is most evident in two places: A brutally non-competitive business tax code that hasn’t come close to dealing with the global realities of the last 30 years; and a glut of tax brackets and deductions that are too confusing, too easy to manipulate, and too divorced from simplicity and fairness. Yes, the rates are too high, both individually and corporately, but beyond that, the system is not right. The efforts of the Trump administration, led by Treasury Secretary Steve Mnuchin, National Economic Council director Gary Cohn, and the GOP leadership of the House and Senate, seek to use a new tax-reform bill to attack the fundamentals of what is broken in the tax code (a non-competitive corporate code) and clean up around the edges as well (alternative minimum tax (AMT), pass-through entities, etc.).

The math of passing tax reform is difficult because of Senate rules on reconciliation. To attach it to a budget bill and thereby enable 51-vote passage, the impact the tax plan can have on overall revenue (and therefore deficits) is limited. “Dynamic scoring” — the reality of supply-side math that pro-growth tax cuts move us in the right direction on Laffer’s Curve — allows for some more liberal use of this parliamentary reconciliation reality. But at the end of the day, the White House is limited in how much it can reform the tax code without “pay-fors” — offsets and such that will enable the plan to be scored within budget-reconciliation math.

After the inevitable death of the ghastly “border adjustment tax” idea, the best “pay-for” available is eliminating the deductibility of state and local taxes against federal tax liability. Should that tax deduction be eliminated, the comprehensive business tax reform needed (a 20 percent rate vs. a 35 percent rate, a territorial system, repatriation of foreign profits, and the elimination of nearly all special-interest deductions) can become reality. And yet the path to tax reform is being blocked by those who would hold on to the abysmal deductibility of state tax — a blockage being promoted by Republicans and Democrats alike (who says they never do anything on a bipartisan basis?).

Who would want to hold onto the deductibility of state taxation? Well, legislators in high-tax states, for one, who fear little consequence from the residents of low-tax states who end up footing the bill for their fiscal recklessness. In fact, the sole source of opposition to eliminating this deduction has come from blue state California, blue state New Jersey, blue state New York, and blue state Connecticut. Unfortunately, the fact that these states are all blue does not mean this is leftist partisanship, because the opposition is coming from Republican legislators and thought leaders in these states as well. That opposition underscores the fundamental need for reform — reform in our policy, but reform in our thinking as well.

There is never going to be reform that does not upset some people, somewhere in the tax food chain. If there could be such a thing, by definition, there would be no need for tax reform! The objective of a national tax-revenue system should be to fund the legitimate functions of government, and do so in a manner fair to the national self-interest, devoid of governmental favoritism or bias. The purpose of a tax system is not to implement social agendas, punish certain behaviors, reward certain behaviors, etc. The federal tax code is a funding matter, and it ought to be done in the least threatening way to growth and competitiveness possible. A 0 percent tax code is not a possibility, as competitive as it may be, as government has responsibilities, liabilities, and legitimate functions that require funding. But where funding can be achieved without compromising American economic growth, that must be the aim.

The business-investment tax code in our country is a disaster, and this is hardly denied by the other side of the aisle. The rate is too high, and the incentives for businesses to keep moneys offshore are gigantic. Additionally, the loopholes, deductions, and various ways in which certain privileged or selected companies benefit (while others do not) is a direct violation of the intent of the tax system. Simplification is the goal, and an even playing field that does not pick winners and losers is the aim. While I would prefer to get rid of the R&D credit (crony capitalism for pharma) and the low-income-housing credit (crony capitalism for real-estate developers), the proposed tax reform goes a long way towards equalizing the business code and creating a competitive scenario for our U.S. companies with large multinational presence.

So what is the hang-up? The aforementioned state-tax deductibility issue is being presented as a hang-up by Left and Right alike. Ironically, the concern the Left has always had with Republican tax maneuvering is that it unfairly assists those on the higher end of the wage spectrum. Here, the Democrats are supposedly upset about the loss of a tax deduction that, by definition, is used only by those on the higher end of the wage spectrum (those who itemize). But let’s look at the issue from the vantage point of Republican voters in high-tax blue states. Could it mean a higher overall net tax liability? That is very unlikely, since those most affected by this would be of such an income context that they have almost certainly been subject to the AMT anyways, a tax atrocity that was already disallowing the state-tax deduction. But for those who were not previously in AMT but are fearful of losing the state-tax deduction, two things must be said. First, no one knows whatsoever how their net picture would turn out in the new tax law, because the income levels receiving the new tax rates (12 percent, 25 percent, 35 percent) have not been announced. Any attempt to model tax liability in the new system will be rank speculation.

Second, if a very small number of people end up paying more, not less, in the new system, it should have no bearing on what we believe about tax reform. I do not believe that will happen, and if it does, I think the net impact will be so small and affect so few, it will not even register. But even if it did, the fundamental question is whether or not residents of South Dakota and Texas should be footing the bill for a federal loss of revenue just because their states choose to run their affairs with a high degree of fiscal sensibility and wisdom. Tax reform is meant to reform what is broken, and the use of a state-tax deduction is discriminatory, unfair, and, worst of all, enabling. It enables high-tax states to make foolish decisions, to overly rely on highly cyclical income streams, to spend without regard to consequences, and to not factor in competitive realities across our cherished 50-state union.

The need of the hour is beneficiaries of the broken tax system to maintain advocacy for reform. The generation-long resistance to reform is a by-product of special interests and a mentality that replaces common-sense tax policy with gaming of the system. We can do better, and for those who know how badly this economy and our national fiscal situation need growth, we must.

David L. Bahnsen is a trustee at the National Review Institute, the managing partner of a bicoastal wealth management firm, and the author of forthcoming book, “Crisis of Responsibility.”

This article was originally published by the National Review

The End of the Electoral College?

VotedThough it means nothing for 2016, the 2020 presidential election may be decided by popular vote — or at least that’s the timeline given by one of the main proponents.

As it stands now, there really is no national election for president, rather 51 elections (including Washington, D.C.), where electors are doled out by the states/D.C., with the winner needing at least 270 electoral votes.

But most states are a foregone conclusion. Would blue California really go for a Republican? Or would red Mississippi chose a Democrat?

In most instance, no chance, so that gives a disproportionate share of attention by presidential candidates to a relatively small group of states like Florida, Ohio and Virginia.

National Popular Vote is pushing to replace the current race to 270 with a simple majority of the popular vote. Bay Area campaign and election lawyer Barry Fadem, who is working with NPV, says this goal can be achieved by 2020.

How Close Are They, Really?

It may seem like a farfetched idea, but the movement is halfway there. Ten states, including California, have ratified the measure (D.C. has signed on as well). Once enough states have ratified the interstate compact to represent 270 electoral votes — a majority — the county will move to the popular vote.

Last week, the Arizona House of Representatives approved the measure. And although it hasn’t voted yet, two-thirds of the Arizona Senate are sponsors. And there are several other states where at least one chamber has approved.

The way the law is structured, the (Constiutionally-mandated) electors of the states that have ratified the compact would choose the candidate who won the popular vote. Therefore, states that didn’t sign on are free to not participate, but they wouldn’t have enough electoral votes to matter.

The theory is that these states would ultimately fall in line, as they’d then have no incentive to stay under the current system once a majority starts with the popular vote.

Why Go Through This Trouble?

Many voters are still upset that in 2000, Republican George W. Bush beat Democrat Al Gore for president by winning the Electoral College while losing the popular vote. While this is largely Democrats who are upset, supporters of the losing candidate would be sour in any similar situation.

“The disadvantages of the current system, of course, are first that you can have an election where the winner of the popular vote loses the election,” said Norm Ornstein, a resident scholar the right-leaning American Enterprise Institute. “It happened in 2000, without many repercussions, but the next time? Watch out.”

Swing states like Florida, Ohio and Virginia have a disproportionate influence on the general election. There are 12 or so states where candidates spend most of their time because the rest are viewed as forgone conclusions. According to NPV, no campaign events were held by the 2012 presidential candidates outside of these 12 states during the general election.

“Two-thirds of the states now are irrelevant, since they are firmly blue or red, giving all the focus to a small number of competitive ones and distorting the election,” Ornstein.

Downsides

Critics have said that a close election could result in a national recount (“take Florida in 2000 and multiply by 50, with a hundred times the number of lawyers,” said Ornstein), but that the federal government really isn’t equipped to handle a recount of that magnitude.

“The federal government does not conduct elections,” said Kyle Kondik, the managing editor of Sabato’s Crystal Ball, a non-partisan political publication from the University of Virginia’s Center for Politics. “So if there was an election that was so close a recount was required, it would have to be a 50-state recount. That sounds challenging.”

There’s also a concern that attention would shift from swing states to heavily-populated areas, like Los Angeles or New York City, on the theory that time-strapped candidates would plan visits to the densest areas to reach the most people at once.

But NPV contends that the densest cities still only make up a small part of the population. According to Census data, the 30 most heavily-populated cites account for only about 12 percent of the population — nowhere near a majority.

Is It Even Constitutional?

While something that fundamentally changes how the president is elected will likely be challenged in court, Fadem says “a Constitutional amendment is not required,” pointing to language in the Constitution giving each state the right to decide how to direct its electors.

Originally published by CalWatchdog.com