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Why Washington Can’t Reform Tax Revenue Policy

April 1, 2014, 6:07 PM
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As we approach our national day of mourning, the April 15th tax filing deadline, Americans once again are witness to an apparently spontaneous breakout of Kabuki theatre in our capital.  Our leaders from Right Left and Center all seem to be heralding a common message: “Reforming our convoluted, inefficient and inequitable tax revenue policies is a critical national priority!”  In the last week alone I’ve received over two dozen emails soliciting my money and signature in support of competing versions of tax reform.  So if this is such a widely shared priority, why is it we can expect no real progress? 

The answer is shockingly simple.  Our leadership is incapable of formulating or debating real solutions to problems; because they are unable to see past the political calculus of protecting their carefully crafted voting blocs.  Despite solemn proclamations that “everything must be on the table”, essentially nothing is on the table, because any change from a pre-existing position represents a threat to their established base.  Compromise is betrayal and innovative thought is anathema. 

Tax reform is indeed a critical priority; we need to examine and address the inefficiencies of our tax code as an economic imperative.   But our current debate ignores the economic challenges we face and instead uses the issue as a means of fragmenting and energizing voters behind emotional, but flawed arguments.  To clarify, let’s look at those recent email solicitations. 

They came, as they always do, in four basic flavors:

1. Conservative: “Help us hold the line against Congressional spending and support the Job-Creators among us by demanding lower taxes and smaller government.  We don’t have a tax problem, we have a spending problem.”

2. Progressive:  “We must increase taxes on the Rich (and only the rich) in order to fund social services for the Poor.”

3. Responsible:  “We have to balance our budget!  It will hurt, but we must share the pain and do it now, or our children will pay for it.”

4. Conciliatory:  “Aren’t we all embarrassed by how dysfunctional our Congress is?  Tell your Congress-people to make nice and compromise.  America was built upon compromise.” 

Each of those first three messages has a strong supporting constituency, for whom it rings with truth and principle.  The more pragmatic and tolerant among us, which perhaps constitutes a small majority, tend to lean toward category four, justifiably believing compromise is integral to a functioning democracy.  But categories one through three are issues of passion, highly resistant to compromise, and conciliation by its very nature is ambivalent, thus less vocal and activist in nature.  So, are we destined to maintain our gridlock, perpetually re-litigating old arguments with no resolution? Unless we expand our debate beyond existing options, we may be; because these competing visions are misguided and irreconcilable. 

Most importantly, none of the proposals currently under debate confront the underlying economic problems we face and the misguided incentives that have created them.  

Our economy has become deeply destabilized.  Dogmatic flaws embedded in our tax and monetary policies have made tax avoidance and valuation manipulation far more profitable than productive enterprise.  Misguided structural tax preferences inadvertently encourage our citizens to invest in asset bubbles in America – while they shift productive investments offshore.  Until and unless we confront and address those structural flaws, and stop subsidizing unproductive capital with preferential tax treatment, we will not stimulate robust and sustainable job creation. 

It’s time to stop treating tax reform as a political issue and examine the misguided economic incentives buried within our tax code.  If we want to stimulate renewed and sustainable economic growth and prosperity we need to remove the misguided structural shelters that currently subsidize unproductive capital.  We need to expand our public debate to examine fresh perspectives and innovative alternatives. 

The path to more efficient and equitable tax revenue policies does not pass through some midpoint between current liberal and conservative dogma.  It will require consideration and examination of more radical and creative alternatives.  As example, a structural alternative I’ve described previously on this site: repealing investment income taxes and replacing them with a tax on accumulated wealth, is an option I perceive spans the current partisan battle-lines.  It could stimulate growth while simultaneously equalizing effective tax rates and more equitably distributing the tax burden and reducing our budget deficits.  Growth, Equity and Fiscal Responsibility need not be not mutually exclusive goals. 

However, the impetus for examining that, or any other meaningful alternative, needs to be driven from the public – because our “leaders” in Washington apparently are incapable of seeing beyond the narrow confines of their existing battle-lines and partisan political calculations. 

Image credit: Shutterstock 

 

 

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