Politically Uncorrected: Tax Reform: The Ultimate Zero Sum Game

Taxes, famously intoned Justice Wendell Oliver Holmes, are “what we pay for civilized society.” Given the tax burden of modern times, some may think we aren’t quite getting what we pay for. Federal taxpayers last year paid about $3.654 trillion for a civilized society – while the states overall paid about $20 trillion for the same.

Whether we are getting what we pay for seems a reasonable question considering the generally deplorable state of our society and politics. Unending wars, incompetent and/or corrupt politicians, public health epidemics, mass shootings, a failing criminal justice system, and a deeply polarized citizenry are not exactly what one thinks about when contemplating a civilized society.

But let’s leave this awkward question aside to consider the even more urgent question of “tax reform.” Just now there is a considerable effort in Washington to fashion a political consensus on federal tax policy that would “reform” the monstrosity known formally as the Internal Revenue Code (IRC), Title 26 of the United States Code (26 U.S.C.).

By common consent, the U.S. tax code is the most arcane, least equitable, least understood and most hated national tax code in the first world. Filled with loopholes, bizarre provisions, undecipherable language and zany interpretations, it is almost certainly both the worst tax system among major nations today and also the worst administered.

Our tax system becomes a bigger mess the longer it survives. IRS regulations, embodied in the Standard Federal Tax Reporter, attempt to translate the tax code so that taxpayers can understand it. That document runs to 70, 000 pages plus – roughly equivalent to 60 full copies of War and Peace.
One might go on ad infinitum documenting the defects of federal tax system. Many writers have done so, using entire books to indict our tax system.

Understandably, it is hard to oppose tax reform, especially when it comes dressed up in the tantalizing prospect of “tax cuts” and “tax simplification.”

But here’s the rub – and it’s a big one. While the overwhelming majority of taxpayers despise the current tax code, they despise even more the prospects of a tax increase. And a tax increase is what tax reform will produce for many.

The respected, nonpartisan Tax Policy Center estimates 7 percent will pay more in 2018, but that will grow to 25 percent paying more within 10 years. Moreover, those hit with higher taxes will not be the wealthy but mostly middle and upper middle-income groups. The Tax Policy Center estimates half of all tax cuts will ultimately go to the wealthiest 1 percent of Americans.

Why does tax reform mean a tax increase for many? It does so because government in modern times never reduces its overall spending. Just the opposite: year after year government needs more revenue, sometimes just to fund existing programs. Someone has to pay those taxes.

Tax reform then must be a zero sum game. It never produces tax reductions overall, but instead produces so-called “tax shifting,” – public finance jargon for reallocating tax liabilities among different taxpayers. In balder terms tax reform produces winners and losers, some will pay lower taxes, some will pay more.

In principal, this is neither good nor bad, for each society has to decide how it will raise the revenues necessary, to pay for “civilized society.”

But what is bad and deserves harsh moral censure is the duplicitous political posturing going on in Washington today, suggesting tax reform means only winners, and only a better, fairer tax system.

Whether a new tax system will mean a better, fairer tax system is something we will find out as we gain experience with it. A lot of past experience, however, demonstrates that today’s reform becomes tomorrow’s problem – as indeed has happened to our current tax system.

But we will not need to wait to find out that tax reform is tax shifting and not tax cutting. The winners already know that and the losers soon will.

Let’s be clear! Arguing that tax reform is tax shifting and not tax cutting is not to argue against tax reform. Indeed, the consensus among most Americans is that we badly need some sort of tax reform. But with it, we also need honesty and candor from our politicians – about what that new tax system will look like – and who the winners and losers will be.

Being honest with Americans about tax reform, how it will work, and who will pay for it, is vital. Without that we will get no real tax reform – and we will all be losers.

5 Responses

  1. It’s farcical to call something that will add thousands of pages to the tax code “reform”. This tax scam is making the tax code even more complicated. We should call it what it is: an unprecedented tax break on corporations and the ultra-rich paid for by the rest of us schmucks who actually work for a living.

  2. Always remember, when the ultra rich were paying a lot more in taxes between 1933 and 1983, the United States recovered from the Great Depression, won WWII, built the national interstate highway system, built the US space program and was the only nation to land a man on the moon several times. Since trickle down, what have we really accomplished? We’re $20 trillion in debt, highways and bridges are failing and our once great space program is a shadow of it’s former self. Tell me again why the ultra rich should keep more of their money to create jobs they haven’t created in the last 35 years since Reagan’s tax cuts?

  3. @Dr. Madonna and Dr. Young
    An impressive and very well written article — nicely done. It was a splendid read. We aren’t getting the honesty and candor needed, indeed.

    On John Harwood’s podcast 16 hours ago, Senator Lamar Alexander said Republicans will be cutting Social Security & Medicare after the bill becomes law. And he said he feels sorry for the rich. I almost choked on my coffee. There wasn’t any reading between the lines what’s coming next.

    Both the House and Senate bills were written in secret for a reason.
    Scholar Norm Ornstein believes all of the bill is disingenuous, and destructive.
    Matthew Yglesias said it’s a corporate income tax financed by Medicare cuts and middle class tax hikes.
    A scholar at Bloomberg says the house bill’s littered with loopholes for Wall Street’s wealthiest.
    The Democrats’ palpable anger during these meetings is for a reason–we are definitely in trouble, and a new analysis says the bill is even worse than we all thought.

  4. Moving the tax burden from people with money, to people without money, 35 years ago, is what has caused the breakdown that we experience today. This new proposal will make it even worse.

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