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The yellow brick road to tax reform

The yellow brick road to tax reform
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With the successful passage of a budget plan by Congress, the stage is now set for much-anticipated legislative action on tax reform. The imminent announcement of the legislative details creates a “Wizard of Oz” moment, when the curtain gets pulled back and all will be revealed. But in order for good tax reform policy to make it over the finish line, it must first translate into good politics. And that will ultimately be judged by how much money gets put back in which voters’ pockets.  

As the details are revealed, we’ll soon be able to see how competing demands for a lower 20 percent corporate tax rate, a tax cut for middle-class families, and fairness for millions of small-business job creators get reconciled. Before the dust settles, to make it all add up, it’s likely that “something’s gotta give.”

To evaluate the plan’s political viability, let me suggest a simple three-part test based on who pays less, who pays more, and who breaks even.

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In terms of who pays less — who gets the lion’s share of the $1 trillion or so net tax cut provided for under the budget deal — in political terms, the answer must be individual taxpayers and families. In 2001 and 2003, my colleagues at the Treasury produced detailed examples of how the Bush tax cuts would benefit a single mom, a family of four, and other typical Americans. It was powerful ammunition. To be successful, the new plan will need to do the same.

 

In 1986, to make the tax-reform math work, corporations ended up paying higher taxes in order to cover tax reductions for individual Americans. Today, poll after poll shows that Americans — both Democrats and Republicans — believe that corporations pay too little in taxes, and that lowering the corporate tax rate is among the voters’ lowest priorities for tax reform.

That reality lies in direct contrast with the focus on Capitol Hill on fixing a distortive and uncompetitive corporate tax code that is out of sync with a global economy. The policymakers are right: economists on both sides of the aisle agree that high corporate taxes hurt investment, workers, and the economy.

But that doesn’t change the laws of politics.  

Convincing skeptical voters that a lower corporate tax rate would translate into more jobs and higher wages on Main Street remains an elusive intangible, and a partisan attack point. Unless perceptions change, it’s hard to see how a big tax cut for big corporations makes it to the finish line unscathed.

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That is not to say that business reform is a lead weight. International reforms, such as switching to a territorial system, repatriating foreign profits, imposing a global minimum tax and bringing back the trillions of corporate profits that have been trapped overseas, would help improve the math and the optics of the bill.

That brings us to the large swath of taxpayers who, after consulting their accountants and lawyers, determine that they will pay about the same under tax reform as they do now. They might wonder what’s the point, and what’s in it for them? A more efficient tax code should mean higher economic growth, jobs and a simpler relationship with the IRS. But to average voters, it could seem like rearranging the deck chairs, and a “just trust us” approach to tax policy. It will be essential to make the bigger case more loudly and clearly to put their minds at ease. 

Finally, how small business gets treated is probably the linchpin of tax reform. Will they pay more, less or about the same? A rush to reform the tax code will be politically untenable if it is seen as leaving out, or coming at the expense of, millions of small businesses across America. 

When the details get revealed, and the curtain is pulled back, we won’t be in Kansas anymore. Will we see a tax cut for the middle class? More money brought back into the U.S. from big multinationals? And will small business face a level playing field? If that needle can be threaded, then we have a good chance of seeing a much-needed win for congressional Republicans, the first major bill signing ceremony for the administration, and taxpayers will be able to celebrate the demise of a wicked old tax code.

Chris Smith is a former Republican chief of staff for the House Ways and Means Committee and the U.S. Treasury under President George W. Bush.