Real tax reform means starting from scratch

Our industrial-era tax code should be scrapped for an entirely new one shaped for 21st century

March 6, 2014 7:00AM ET
Representative David Camp, a Republican from Michigan and chairman of the House Ways and Means Committee, speaks during a news conference in Washington, D.C., U.S., on Wednesday, Feb. 26, 2014.
Andrew Harrer/Bloomberg/Getty Images

News broke last week about a major new "tax reform" proposal on Capitol Hill. But while the 979-page bill that Rep. Dave Camp (R-Mich.) issued last week contained ideas excellent as well as awful, it didn’t represent "reform" at all.

“Reform” means improvement. News reports should generally avoid that term, except in remarks attributed to advocates. In news articles, as opposed to opinion columns like this, “change” and “overhaul” are appropriately neutral terms.

Three planks in Camp’s proposal show that it is not reform but business-as-usual, brought to you by the powerful lobbying interests that dominate lawmaking in Washington and whose agenda favors shifting tax burdens down the income ladder.

First, Camp would incentivize multinational corporations to use accounting tricks to siphon profits out of the U.S., which they could then bring back while escaping taxes on 95 percent of these profits. That would be unfair to purely domestic companies, especially small family-owned businesses, which lack the global reach and sheer scale required to use these tax-avoidance schemes. It would also further erode the integrity of both the tax system and accounting.

Second, his bill would let oil and gas pipelines, which are regulated monopolies, charge their captive customers the costs of the federal corporate income tax even though pipeline partnerships are exempt from that levy. Camp's failure to address profiteering from taxes in this and many other areas is significant given the carefully polished image of Republicans as champions of lower taxes.

Third, Camp would retain the rules that let nonprofit civic welfare organizations, known as C4s, continue to use untraceable money to influence elections. Unless you accept the ideological mantra that dollars equal speech, this rule undermines our democracy.

To be fair, Camp at least deserves credit for trying. Apart from exposing tax games, the Democrats seem unable to agree even on constructive fundamentals, let alone offering solutions.

Most troubling, though, is the process by which the Camp bill was written. Not only did it have no input from House Democrats, but it was drafted in secret without the public knowing which lawmaker, or which lobbyist, proposed its various provisions.

Secret backroom deals, cynics might say, are how tax laws have always been written. There's a lot of historical truth in that, but it does not make it any more appropriate than the fact that the Constitution initially embraced the purchase and sale of human beings.

Sure, Camp’s bill has no chance of becoming law in this Congress, a point emphasized in many news reports. But the important point is that we need tax reform and so the idea of new proposals should be welcomed.

Actual tax reform will occur only after intensive study of the sort the Reagan administration pursued three decades ago in ushering in its 1986 overhaul of the tax code.

Our federal income tax system began in stages — in 1909 (corporations), 1913 (individual incomes) and in pieces through 1924 (gift and estate taxes that act as a backstop to the individual come tax). The system was designed for the industrial economy and, during World War II, expanded to levy most wages.

But that system has broken down in the context of our globalized 21st century economy, in which many people are self-employed and many higher paid workers receive not just cash, but stock options and other forms of compensation that the system does not track very well. Meanwhile, since the IRS conducts fewer audits nowadays, tax avoidance is easier, especially for large, complex businesses and the wealthy who can get away with it.

Continued inaction risks terrible damage because it is not raising enough revenue to meet basic needs, including maintaining and upgrading infrastructure and investing in research and education. Shorting these areas means the U.S. will be less well off in the future.

Actual reform will occur only after intensive study of the sort the Reagan administration pursued three decades ago in ushering in its 1986 overhaul of the tax code. But it will also require a transparent process, which is not what happened then or since, as targeted favors for special interests have larded our tax code with no public identification for which lawmaker sponsored the provisions.

Our federal income tax system is an indefensible mess, a mélange of rules that seem straightforward on the surface but paper over thousands of pages of special favors to campaign donors and influential industries that damage both our economy and the liberties of the people. That the monopoly pipeline industry forces customers to pay it a tax it does not owe is a prime example.

Despite 979 pages of proposed new rules, all Congressman Camp does is tinker. But such adjusting is not what the American public needs. What we need is political support for the creation of a modern tax system.

Both House Speaker John Boehner and Senate Minority Leader Mitch McConnell made clear that the Camp bill was dead on arrival. “Blah, blah, blah, blah,” Boehner said, mockingly.

What the news reports missed, however, was the significance of the dismissal: Our leaders’ refusal to invest their political capital in a new tax code means that existing tax law will continue to damage our economy. In fact, our current tax code is so beyond repair that substantive reform requires a tabula rasa — taking out a clean sheet and starting all over, because the industrial age that current law was created to serve is receding into history.

That is hard to do, especially when more than a century has passed since Congress first designed an income-tax system from scratch to meet the demands of a changed economy. But the creative destruction of the digital age will continue whether Congress acts or not, making our tax system more out of alignment with economic forces each day, effectively throwing sand in the gears of the economy instead of lubricating it.

Taxes are the core of our democracy. Although taxes are often mentioned as a partisan issue, they are a bipartisan concern. There is no United States of America with all of its freedoms and opportunities without taxes. We cannot insure domestic tranquility, promote the general welfare, establish justice, provide for the common defense nor secure the blessing of liberty for ourselves or our posterity without the IRS. These principles of the Second American Republic, was born of the failure of the First Republic because Congress, under the Articles of Confederation, lacked the power to tax.

What America needs is popular support for the hard work of figuring out how, in the digital age, we raise the revenue necessary to sustain the United States of America in the most efficient, least distorting and fairest way. No matter what your political persuasion, you should favor a new tax code.     

Tell your politicians you want real tax reform at every campaign stop. And then hand each candidate a blank sheet of paper.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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