HOW TO REFORM THE TAX CODE
Main Street and Wall Street need changes to endure beyond the next election
The most important question in the Washington tax code debate isn’t being discussed at all: Whatever Congress passes, how long will it endure?
We don’t need a short-term fix. What we really need is a tax code built to outlast partisan storms and political personalities, something people on Main Street and Wall Street can count on long term. This must be a built-to-endure mission, in the vein of famous business consultant Jim Collins.
What the details should look like is open to question. The details always get negotiated to oblivion, so I see no point in slicing and dicing the Trump administration’s tax reform outline. Much more important is that the plan is built to endure so people can make long-term investment decisions on the expectation that property rights won’t change. WIGGLE ROOM People are really good at wiggling around rules as they change, but that’s all short-termism. Whatever Congress passes should have long-term credibility and viability, not simply be a law you can take advantage of for just a little while before the Democrats get in power and flip it back.
People get hung up on details, such as corporate tax rates. But what matters most is defining property rights between government and citizens. What does the government get? What do people get to keep? What do we get to do with what we keep? Where do we draw the line, and is that line bright and enduring?
Having confidence that property rights won’t change enables businesses to make long-term capital expenditures — new plants, new research and development, new equipment, new software.
If we drop the corporate tax rate to 15%, fine, but if everyone believes it will rise again in 2021 or 2025, we’ll get business transactions between now and then that help for the next four years but don’t change the world.
Enduring change would break the last 20-plus years’ vicious cycle of finessing the tax code, fussing with its minutiae, and tinkering endlessly to create wiggle room. We’ve passed a lot of rules that lasted only briefly, creating uncertainty whenever they were sunsetting.
Remember the 2012 “fiscal cliff ” debate? That came from temporary tax tweaks. Businesses and markets handled it, but it takes lots of accounting cuteness to navigate an ever changing tax landscape. If business leaders are forever trying to maximize profits within a short low-tax window, they’re making more short-term decisions and far fewer long-term decisions. Spending more on consultants and tax compliance, less on productive employees and capital expenditures. FEAR OF FUTURE LOSS The threat of change, whether through taxes or regulations, creates fear of future loss. And that fear is much more powerful than hope for a corresponding gain. Hence, in the face of the unknown, potential losers envision scenarios far worse than whatever is realistically likely to happen and make short-term decisions to avoid them.
If the Republican Congress passes another round of mere tweaks to the tax code — taking this out, putting that in as necessary to pass it along party lines — the tax reform that President Trump signs will do no good.
All the wiggles are counterproductive if people believe the Democrats will erase it all the first chance they get. Most people and businesses will focus on squeezing out as much as they can in the next four years. Far fewer will bother writing a 10- or 20-year business plan, let alone investing in one to make it a reality.
If the GOP can only pass something 52-48, then the Democrats can probably undo it when they regain the edge. Only broad, bipartisan reform is believable. Hence any changes should be simple and consistent with values that might not be universal but at least extend beyond party lines.
Even a mediocre plan, if implemented with bipartisan support, will help people know what’s what. Main Street and Wall Street will get a sense of clarity, and you’ll start getting those 10-year business plans and the flood of investment that comes with it. Simply knowing what portion of profits will go to the government every year, indefinitely, frees up capital for all manner of productive use.
All tax changes create winners and losers. But short-term changes create more losers, because someone has to pay for the winners who get to make hay in that small window.
Credible, long-term change maximizes winners and does the most for our economy and markets. It’s time to finally make that “grand bargain.”