Think Your Income Tax Rate Will Get Cut Through Tax Reform? Think Again
Robert Hardaway is a professor in the Sturm College of Law. After serving four years on the U.S. Navy JAG Corps, Hardaway joined a Denver law firm where he practiced civil litigation. He later served as a Deputy District attorney for Arapahoe County and a Colorado Deputy Public Defender before starting his work at the University of Denver. Hardaway is the author of 14 published books on law and public policy, and 29 law review articles, reviews and articles in professional journals.
With almost half of all Americans paying no federal income taxes — that’s zero, zilch, nothing — it quickly becomes apparent why taxes can never be cut. There are two reasons why.
First, those who pay no federal income taxes generally see no advantage in cutting taxes they don’t pay anyway, and therefore won’t support any politician proposing tax reduction of any kind. In fact, they punish any politician who dares to reveal the fact that almost half of the electorate pays no federal income taxes — witness what happened to Romney in the 2008 presidential election.
Second, any tax cut proposal, no matter how favorable to lower income taxpayers, will always be at the mercy of demagogic politicians who denounce such proposals as “tax cuts for the rich.” For example, consider a tax proposal that would reduce taxes for the lowest income taxpayers by 99 percent, but reduce taxes for higher income taxpayers by only one percent. For the lowest income taxpayer who is among those Americans who actually pay at least some income tax — say $1 — the 99 percent reduction will mean he will only see a tax reduction of 99 cents. For a higher income taxpayer, however, a one percent reduction will mean a greater tax savings in absolute dollars, thus the opening for the demagogues.
There are additional reasons why taxes, particularly for corporations, can never be cut, and here is where Americans pay a high price for the failure of our public schools to teach basic macroeconomics. The few voters who have had some exposure to economics understand that corporate taxes are simply a disguised regressive sales tax: corporate taxes, like any other cost of production is ultimately reflected in the price of a product, in much the same way as the cost of steel is ultimately reflected in the price of a car. The result is that, unlike sales taxes which can accommodate low income consumers by exempting such products as food, clothing, and medicine, corporate taxes allow for no such means of making its disguised sales tax more progressive.
Cutting corporate taxes would also mean taking on the China lobby, which opposes any U.S. corporate tax cuts since it would mean that companies would then choose to build their factories (and create jobs) in the U.S. rather than China. Those who oppose reducing the U.S. trade and budget deficit would also oppose any reduction in corporate taxes since it would mean the repatriation of trillions of corporate dollars to the U.S., where it could be taxed to reduce the deficit, create jobs and promote economic growth. Finally, any corporate tax reduction or simplification would also mean taking on the tax lawyers’ lobby, who make a living navigating the incredibly complex corporate tax code looking for complex loopholes for business clients who can afford their services.
Individual tax reduction, or even just simplification, also faces obstacles. For every tax “deduction” or “loophole” in our geometrically expanding tax code and code of regulations, there exists a leviathan and fanatical public interest group fighting to preserve their advantaged tax deduction or favored status. Consider the home mortgage deduction. Originally conceived as a subsidy and incentive for the middle class to own a home, the deduction is now denied to the bottom two-thirds of Americans who either can’t afford to buy a home, or can’t use it because it doesn’t exceed the poor man’s “standard deduction.”
Although disingenuously justified by the real estate lobby as an incentive to home ownership, the fact is that other countries around the world with no such tax deduction enjoy far higher rates of home ownership. But perhaps the most immoral aspect of this deduction is that it increases with wealth. The richest homeowners who build the most extravagant homes are rewarded with up to a million dollars in tax deductions — costing the government over $80 billion a year in foregone revenue — while the less fortunate get far less or nothing.
Rather than pay a flat 12 percent tax rate, without any complicated “deduction” only available to the rich, Americans seem to prefer paying at a 35 percent rate but getting their tax rate down to 18 percent by means of paying tax lawyers and accountants to scour for deductions. Less important than actually paying a lower bottom line rate is the satisfaction of knowing that you are getting something that others don’t get, even if you pay through the nose for that dubious satisfaction.
But even if one could convince voters of the advantages of a fair, progressive tax plan with zero deductions, there remains the problem of convincing two virtually immovable and monolithic constituencies: the politicians who thrive on carving out special deductions for favored interest groups who finance their campaigns, and the tax specialists and accountants who thrive on navigating an increasingly complex tax code.
There remains one — and perhaps only one — hope for rational tax reform and simplification: passing legislation that would allow Congress to make the tax code as unfair and complicated as they want, but with only one provision — that any member of Congress voting for it must first prove that they calculated their own taxes without the help of “professionals.”