29 – Why Is It So Hard?

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In Number 27 of this series, published in April of 2017, I wrote about the fact that the Congress was about to begin an effort to revise the tax code, in response to President Trump’s campaign promise to lower the business tax and personal income taxes. We are now deep into that effort, and (as of this writing, anyway)it appears it’s going to suffer the same fate as the effort to repeal and replace Obamacare—complete and utter failure.

I’ve never claimed to be the brightest bulb in the chandelier, and maybe that’s why this tax-reform effort seems so unnecessarily convoluted. If I wanted to cut the income tax, here’s how I’d do it.

The average American taxpayer—let’s call him John Doe—makes a certain amount in a given year. That’s his “gross income.”

He takes personal deductions for himself, his wife, and his children. He deducts the interest he pays on his mortgage, as well as the property taxes he pays. If he lives in a state that has a state income tax, he deducts the amount he pays to his state. He probably has a few other deductions. After subtracting all his deductions from his gross income, he’s left with his “taxable income.” That’s the amount he pays the federal income tax on. He goes to the federal tax tables, looks up his taxable income, and the table tells him how much tax he owes.

Okay, we all know it’s not as simple as I’ve made it out to be, but the process is as I’ve presented it. We start with our gross income, figure out our deductions, arrive at our taxable income, and look up how much tax we owe in the tax tables.

If I wanted to reduce the personal income tax, all I would do is revise the final step—the tax table. Where the old table said that on a taxable income of <this much,> Mr. Doe owed <this much> in taxes, the new table would say that on the same taxable income, Mr. Doe now owes somewhat less. It seems to my simple mind that the objective of reducing the personal income tax would have been accomplished.

But the Congress doesn’t do that. They have never done that. Every time they tinker with the tax code, whether to raise taxes or lower them, they have essentially rewritten the entire law. They increase some deductions and decrease others. They expand some deductions and put limits on others. They add some deductions and completely eliminate others.

The result is that some taxpayers will pay less in taxes—but some will pay more. Mr. Doe’s tax bill is going to change, but depending on his gross income and what deductions he can legally take, it may go up or down—and by a lot, or just a little.

 

That’s why we’re hearing Democrat politicians claiming that the proposed change will increase taxes on the middle class, while Republican politicians are claiming that the same law will reduce middle-class taxes. Both sides are “cherry-picking” their examples. Each side is saying “With a gross income of <this much> and <these> deductions, the income tax bill would be <higher> or <lower.>

And they’re both correct. People who conform to the Democrat example will pay more taxes. People who conform to the Republican example will pay less in taxes. That simple fact renders null and void the entire concept of reducing taxes. If one person pays less while another person pays more, we haven’t reduced taxes—we’ve merely robbed Peter to pay Paul.

 

While I’m up here on this soapbox let me mention two more things. As I predicted in Commentary Number 27, the Democrats are demanding that the revised tax code should increase taxes on the top earners, because “the rich don’t pay their fair share.” In response, the Senate version that was passed out of committee (by a Republican majority, no less) adds a new tax bracket. They propose to tax the top earners at 45.6 percent—a fifteen percent increase from the former top bracket of 39.6 percent.

As I pointed out in Number 27, the Democrats (and the Congressional Budget Office, a notoriously liberal bureaucracy) insist on treating the economy as static. They claim that lowering the tax rate will result in less taxes collected by the federal government. Despite ample historical data, they refuse to acknowledge that in every case, without fail, when taxes on the top earners were reduced, the economy grew and so did tax revenues to the federal government.

 

Hand in hand with the static economy fallacy is the Democrat demand that any tax cut has to be “revenue neutral.” That is, for every dollar of “lost revenue,” there must be a dollar of reduced spending. This is just another way of delaying or even killing the tax reform agenda. Naturally, the Democrats want to take the decreased spending out of things like the defense budget, while the Republicans want to take it out of social programs like welfare. When they can’t agree on a compromise, the bill often dies.

 

In my opinion (keeping in mind that my opinion and four quarters will get you a dollar bill), neither party wants to see a tax reduction bill pass. Politicians of all persuasions think their job is to tax and spend. We have a twenty-trillion dollar national debt because they insist on spending more every year.  That, in turn, justifies them raising taxes from time to time because it’s necessary to service the debt—pay the interest and a little of the principal. Reducing taxes is contrary to everything they think they’re there for. They talk like they’re in favor of it, while finding all sorts of creative ways to make sure it never happens.