Why is Tax Reform So Difficult?
Among the key initiatives scheduled to be taken up by Congress and the executive branch this year is Tax Reform. While most people have been in favor of making the US tax code “better”, it has been a very difficult task to accomplish. In fact, the last significant tax reform package passed at the Federal level was in 1986, during the Reagan administration, with bipartisan support.1 Since then, there have been changes to certain tax rates and rules, but not what would be considered to be comprehensive reform.2
A key hurdle to Tax Reform has been defining what is meant by “Tax Reform”. Some economists and policymakers have advocated simplifying the tax code and the tax filing process. For decades, they have proposed a “postcard sized” tax return with a flat tax rate and few, if any, deductions. Others have argued for a more progressive tax code, with tax cuts for lower and middle income individuals and higher tax rates for the wealthy. A third group (some of which are known as supply siders) see Tax Reform as cutting corporate and individual tax rates across the board. Supply siders believe that the economic growth generated by tax cuts will generate additional tax revenue to offset the lower tax rates.
Another challenge to Tax Reform involves the budget process and the federal deficit. If there are not enough votes in the Senate to pass a tax bill, a procedure known as reconciliation would only require a simple majority to pass a tax reform proposal. However, a simple majority vote is not allowed if the proposal adds to the budget deficit after 10 years. In essence, decreases in tax revenue from tax cuts which increase the deficit would have to be offset by (in many cases, unpopular) spending cuts.
There are, of course, many players in the tax reform debate, including legislators, businesses, individuals, accountants and state and local governments (some of which benefit from significant deductions of state and local taxes). It is therefore not surprising that many analysts believe that comprehensive Tax Reform will be even more complex and difficult than health care reform. Time will tell.
- The Tax Reform Act of 1986 lowered the top tax rate from 50% to 28% and raised the lowest tax bracket from 11% to 15%. The number of individual tax brackets was eventually reduced to two, and many deductions were eliminated. Corporate tax rates were reduced from 46% to 34%.
- Under the Bush, Clinton and Obama administrations, there have been a mix of changes to the tax code. For example, the top tax bracket was increased from 28% (39.6% today); the highest capital gains rate was reduced from 28% to 20%; and number of tax preferences were added under the Taxpayer Relief Act of 1997.
NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.
About Frederic Slade
Frederic Slade is Assistant Vice President and Senior Director, Investments at Pentegra Retirement Services. He joined Pentegra in May 2007 as a Senior Analyst in the Investment Department and became Director-Investments in January 2013. He is responsible for managing over $1 billion in internal bond portfolios and providing asset/liability studies, analytics and product strategy for Pentegra’s Defined Benefit and Defined Contribution Plans. Mr. Slade is also a frequent contributor of economic and financial market blogs to Pentegra’s Talk to a Specialist website and the financial media. Prior to joining Pentegra, Mr. Slade was a Senior Quantitative Analyst at Citigroup Asset Management, providing asset allocation and quantitative stock screening for mutual fund products. Prior to Mr. Slade’s tenure at Citigroup, he was an Investment Manager at NYNEX Asset Management (now Verizon). At Verizon, Mr. Slade was responsible for asset allocation and planning for its $15 billion Defined Benefit pension fund. Mr. Slade holds a Ph.D. in Economics from the University of Pennsylvania and a CFA, and is a frequent presenter at industry seminars and conferences.