The petty politics of tax reform
Tax reform with lower rates and fewer loopholes would be good for America and popular with voters. But substantive reform won't come anytime soon.
To understand why, it's helpful to remember that America's political heritage did not begin in 1776 but on the streets of London in the 16th to 18th centuries. Those were the formative years for the political ideas embraced by our Founding Fathers. Similar to America today, those years in London saw a high level of tension between the general public and the elites.
Robert O. Bucholz and Joseph P. Ward describe a curious reality about how that played out in their book, “London: A Social and Cultural History, 1550-1750.” During those years, more and more crimes were made punishable by death, including housebreaking, shoplifting and pickpocketing. Yet while the list of capital crimes grew longer, there was a steady decline year after year in the number of people actually put to death.
This was a system that allowed the government to terrorize citizens into compliance with draconian laws while allowing the king and his court to appear merciful when those convicted were allowed to live. That's the underlying logic that guides political opposition to tax reform in this country.
Among the public, there is strong support for reform, and it is quite possible to craft a politically popular solution. Eighty percent say it's important to replace the existing tax code with something simpler. The idea of lower rates and fewer deductions is very popular. Still, when you get into the details, it's tough to take away deductions that benefit the middle class, like the home mortgage interest deduction.
One way to address this is to leave all the current deductions in place for lower- and middle-income Americans. Then phase out deductions for those who make more than $250,000 a year and completely eliminate them for those who make more than $400,000 annually. This approach is supported by 52 percent of voters and opposed by 30 percent. Those with higher incomes are more evenly divided.
At the other end of the income scale, 68 percent of voters think that the first $20,000 of income earned by everyone should be tax-free. Despite Republican grumbling about it during Election 2012, this concept should be part of any reform designed to win public support.
When it comes to tax rates, there is little or no support for a so-called flat tax. But there is a lot of support for something with just a few rates: perhaps 10 percent on the first $50,000 of income, 15 percent on income up to $250,000 and 20 percent above that. If the numbers worked out to be revenue neutral, voters would love it.
America's politicians and financial elites would hate it, however. Like the kings of England long ago, they benefit from a system with high rates and lots of deductions. They can assert a right to tax everyone heavily while displaying mercy with the gift of deductions. The ability to control deductions allows politicians to direct money into politically approved areas of the economy or to help the politically well connected. As a bonus, political leaders can extort donations from industries that want a little help from the government.
That's the challenge. Tax reform works for America but not for the political class.
Scott Rasmussen is founder and president of Rasmussen Reports.