Tax reform will be fight against special interests
© Greg Nash

The reason that it has been 31 years since the last major tax reform legislation, in spite of a bipartisan recognition of the need for reform, is that the process of change is arduous and painful.

Every interested party is trying to protect its special provisions by making sure that someone else's ox gets gored. This condition is an application of the Nash equilibrium — named after game theory-creator and Nobel Laureate John Nash — and means that the prospect of loss by the uncertainty of reform provisions leads parties to accept suboptimum outcomes to protect the status quo.

Homeowners want to protect mortgage deductions; charities, the charitable deductions; healthcare providers, the medical deductions; and accountants, the code's complexity because it is good for business.

The same myopia applies to businesses that have obtained provisions that give them a competitive advantage.

House Speaker Paul RyanPaul RyanCNN's Kohn, Ben Shapiro in Twitter spat after controversial 'killing spree' Ryan tweet Ryan: 'Prayers are being answered' for Scalise's recovery Rift opens in GOP over budget strategy MORE (R-Wis.) and House Ways and Means Committee Chairman Kevin BradyKevin BradyHouse chairman calls on Senate to redo Russia sanctions bill before recess GOP chairman: More tax-reform hearings coming in July Overnight Finance: CBO finds 22M more uninsured under Senate health bill | GOP agrees ObamaCare taxes must go | Supreme Court to look at Dodd-Frank whistleblower protections | More tax reform hearings | Green light for partial travel ban | MORE's (R-Texas) proposed "A Better Way" blueprint is a comprehensive approach to lowering tax rates for large and small businesses, and dramatically reducing the marginal tax rate on new investment. The plan will simplify compliance, meaning that more filers won't have to itemize their deductions.

Three goals are reflected in the structure of their plan: simplicity, greater efficiency and establishing a level playing field without adding to the national debt.

ADVERTISEMENT
While a number of economists view the plan as a major improvement that will lower compliance cost, incentivize greater investment and stimulate greater economic growth, it has also attracted some opponents who prefer a known and distorted code to the uncertainty of fundamental reform — even though that will benefit the overall economy and the vast majority of taxpayers.

 

The unfolding opposition was predictable based on the experience of the 1986 tax reform legislation. That experience was described in detail by Jeffrey Birnbaum and Alan Murray in their book "Showdown at Gucci Gulch." In spite of strong opposition from special interests, the Tax Reform Act of 1986 turned out to be the "single most sweeping change in the history of America's income tax."

It overcame entrenched special interests like there are today. Although the public was disgusted with a tax code "that was seen as benefitting the privileged but skeptical and felt that as bad as the current system was, any changes probably would compound the inequities and increase taxes for the average citizen." While that could be described as the current perception about prospective reform, the stock market is sending a signal that there is a strong belief that President Trump will be able to fulfill his promise of fundamental reform that will create more jobs and a robust economy.

Support for reform is stronger today than it was in 1986, but it still faces tough opposition. Democrats appear to be ready to stonewall any major presidential initiative and, in other circles, the army of special interests are mobilizing against the tax reform blueprint.

One example is the growing opposition to the Ryan-Brady proposal for a border adjustment  tax, even though, ironically it would benefit domestic U.S. businesses. Today, foreign companies get a significant break because most exporting countries allow their exports to be free of taxes. Since domestically produced goods are not tax-exempt, the playing field is tilted in favor of foreign companies that import to the United States.

Companies that import don't want to give up their advantage. They are trying to generate public opposition by claiming that border adjustment will raise the cost of imports and that cost will be borne by consumers.

That allegation has been challenged by economists like Martin Feldstein, Harvard professor and former chair of President Reagan's Council of Economic Advisors, who pointed out that border adjustment will lead to a stronger dollar which has the effect of making imports cheaper.

Critics make it appear that if a 20 percent adjustment fee is applied to imports, consumer prices will go up by 20 percent. For that to be the case, markets would need to have certainty that higher costs can be passed through to the final price. In a competitive market, market forces put downward pressure on prices and if a competitor tries to raise his price, he loses market share.

Those who criticize the border adjustment can't just criticize; they need to offer an alternative, since the current situation discriminates against domestic sellers of goods and services. Not leveling the playing field would be a big missed opportunity and would open the reform process to retaining other special interest provisions.

Congress should take on this historic opportunity to level the playing field so that all American companies will be treated equally.

William O'Keefe is the founder and president of Solutions Consulting. He formerly served as CEO of the George C. Marshall Institute, a nonprofit that conducted technical assessments of scientific issues with an impact on public policy.


The views of contributors are their own and not the views of The Hill.