The policy talk in Washington recently has been focusing on tax reform. The general idea of tax reform is to simplify the tax code, broaden the tax base and lower the tax rate. Less deductions and loopholes combined with a lower tax rate could generate a similar amount of revenue for the government at a lower cost to both taxpayers and the government. This general concept likely has bipartisan support. I should pause here to define bipartisan since it is rarely seen. It means legislators from more than one party support a piece of legislation.
At first glance, it seems like the only people who should be in favor of a complex tax system with a multitude of legal loopholes should be professional tax advisers and tax professionals. These are the talented people who get paid to help individuals and businesses navigate the complex tax system. I don’t think that the tax professionals are a large constituency that will block progress toward tax reform. However, every section of the tax code has a group of taxpayers that benefit specifically from that particular section. So eliminating (simplifying) sections of the code in the name of simplification can be challenging because each section has a taxpayer base that supports it. We probably all have a favorite piece of the tax code (Depreciation, Mortgage Interest Deduction, Child Tax Credit, Retirement Contribution Tax Deduction, Deductions for Educational Expenses, Charitable Donation Deductions, etc.). Each of these deductions encourages some activity like saving for retirement or donating to charity. It hard to argue we don’t want to encourage donating to charity.
From an economist’s point of view, thoughtful tax reform could create substantial benefits by reducing the costs associated with a complex tax code. The resources spent by individuals and businesses tracking, reporting, documenting and calculating their income and the appropriate deductions for the year produce no real value to the economy. I can assure you the hours I personally spend collecting my tax documents and submitting that information to the IRS could be better spent. On top of these costs, the IRS is tasked with ensuring no one cheats (intentionally or unintentionally) the system and thus must spend resources trying to identity and prosecute tax related fraud. If we can reduce these “costs” then overall economy should benefit.
Is it possible that we will see tax reform legislation enacted in 2017? My crystal ball appears to be a bit hazy at the moment with wildfire smoke but here is my best guess. The Trump administration has had few legislative accomplishments up to this point. I assume President Trump and his team are learning from past legislative experiences. They will likely spend time building support for this effort and it will be easier to build support than it was for healthcare reform. Bipartisan support is possible. However, everyone will have to compromise on some favorite parts of the tax code for tax reform to occur and yes, I think it will occur.
