What’s the Rush to Fix the Tax System? It Works Just Fine

This article first appeared on Dorf on Law.

The death of the Republicans' latest effort to take health care away from tens of millions of Americans is already a fading memory.

Sadly, we can be sure that that zombie will rise again. The Senate's rules that supposedly constrained the Republicans in their efforts can, after all, be changed -- by the Republicans.

We can, therefore, count on a fourth, a fifth, and ultimately as many go-rounds as possible, so that Republicans can continue to pander to their base and donors.

Although it is crucial to defeat Republicans' serial efforts to destroy the American health care system, the problem is that the system really does need help -- not a lot of help, but just enough effort to stabilize the insurance markets and keep the system functioning in its less-than-perfect way, keeping more people alive than the Republicans' alternatives would allow.

This means that real human beings will suffer if Congress does nothing about health care. Fewer will suffer than if Congress does the wrong thing, but affirmative effort needs to be expended to prevent a medium-sized catastrophe. Based on everything we have seen thus far, unfortunately, Donald Trump and the Republican leaders in Congress will aggressively fight such an effort.

Taxes are different. True, just as they did with health care, the Republicans are once again embarrassing themselves, running around with a terrible set of ideas that they do not even understand, trying to tell everyone that Trump's obviously false promises will somehow become reality and that they know how to make everyone better off.

GettyImages-56043648 Current federal tax forms are distributed at the offices of the Internal Revenue Service November 1, 2005 in Chicago, Illinois. Scott Olson/Getty

Who cares that their non-plan omits most of the essential details? That vagueness merely allows Trump's shills to have it both ways, scolding critics for jumping to conclusions based on incomplete information while simultaneously claiming that the yet-to-be-specified changes to the tax system will not be regressive.

The U.S. tax system is currently far from perfect, but a fair assessment of it is that it is good enough. Just like the health care system, Trump and the Republicans would love to make it much worse, and they will fight efforts to make it better. The difference is that, as far as the tax system goes, we will be just fine if nothing at all is changed.

But surely, you say, we have heard politicians of all stripes complaining for decades about our tax system, saying that it is too complex, that it discourages work effort, that it puts American companies at a competitive disadvantage, and that it is preventing our economy from thriving.

Nonsense. The fact is that we now have a tax system that will continue to work reasonably well unless we take actions that will throw it off the rails. Although improvements to any system are always imaginable, we would spend our time much more wisely by focusing on other issues that require our more immediate attention.

How can I say that the tax system is not so bad? As I have been noting for the last few years (including in a column last week ), there is no serious evidence that cutting taxes would lead to increased economic growth. American companies are doing just fine, with low effective tax rates and highly competitive international operations.

The system is in some ways more complicated than it needs to be, but that complexity barely touches the vast majority of taxpayers, and those who do feel the complexity are well positioned to deal with it, because the accountants and lawyers whom they would hire in any case can also deal with taxes.

(One very unfortunate exception to this is the Earned Income Tax Credit (EITC), an incentive system for the working poor that is needlessly complicated. Republicans, who used to like the EITC, have become obsessed with rooting out trivial numbers of possible errors in that system, at the expense of the people who truly need the system.)

Most importantly, the U.S. tax system is now essentially on autopilot. That is, all of the things that used to force Congress to take action on taxes are now done automatically, removing Congress's need/excuse to muck around with the tax code. They can still try, but the immediacy is no longer there.

Prior to the big 1981 Reagan tax cuts (which President Reagan largely reversed with a series of subsequent tax increases, making him unelectable under current Republican dogma), income tax brackets were not automatically adjusted for inflation. In years (like the 1970s) with relatively high inflation, that made it necessary for Congress to intervene on an ad hoc basis, to prevent "bracket creep" from inadvertently pushing people into higher tax brackets. And while they were making those ad hoc adjustments, members of Congress could also make other changes to the code.

Now, the initial excuse for taking action has been removed. Similarly, the most recent big tax bill, which Barack Obama signed early in 2013, put the estate tax on automatic pilot, mandating annual inflation adjustments to an (indefensibly large) tax-free exemption amount.

And the 2013 bill also removed the last remaining built-in features that would require action by Congress. Many readers will remember the term "fiscal cliff." Those two words dominated political talk for months in 2012, but the details of that political circus are now mostly lost to the mists of time.

The so-called fiscal cliff was a situation in which, had Congress not acted, taxes would have automatically increased. Or, to put it more accurately, what had been enacted as a temporary tax cut would have come to an end. The Bush tax cuts in 2001 had been passed with a ten-year expiration date, and after Obama and the outgoing congressional Democrats in 2010 agreed to a two-year extension, the witching hour was reached at midnight on December 31, 2012.

There were also some automatic spending cuts that also happened to have the same trigger date, which meant that inaction by Congress would have felt like action. Although the cliff metaphor was overly dramatic, there would certainly have been large and obvious automatic adjustments to spending and taxes that many, many people would have felt and that would have harmed a still-weak economy.

The bill that Congress passed on New Year's Day in 2013 ended all of that. Now, the tax system will cruise along with no expiration dates and no bracket creep, unless Congress actively does something to change the system.

In another recent column, I addressed the argument that businesses would rather have permanent tax cuts than temporary ones. My assessment of that argument was not kind:

Businesses famously want stability, but the idea that a tax bill that is called permanent is actually permanent is hopelessly naive. Even a decision maker who is responsive to what taxes might be years down the road must engage in a probability analysis about the political environment even a year from now, much less in a decade.

Any executive who says, 'Oh good, the tax system has been rewritten in our favor, so we can assume that it will stay that way,' should be fired.

I stand by those words, but there is a further aspect of that argument that is worth considering here. If it is true that so-called permanent tax legislation has an autopilot-like effect, then a probability analysis would at least have to put a stronger weight on the likelihood of sheer political inertia allowing permanent legislation to continue, unless there is something in the legislation that will eventually bump up against an external reality (such as inflation).

Even so, any assessment of the likelihood of the tax law remaining unchanged must be well below one hundred percent, as the Republicans' never-ending efforts to change the tax code attest. They are constantly trying to justify tax cuts with snake-oil claims of growth surges and "dynamic effects" that allow the cuts to pay for themselves.

The fact is that tax legislation is catnip to politicians, especially Republicans.

So my point is only partly to predict that the autopilot aspect of the current tax code will doom the current Republicans' efforts. Beyond that tentative prediction, I am arguing that Democrats should be aware of the simple fact that our current tax system is good enough (in large part because it prevents crises from emerging when Congress does nothing).

Not only are we not in danger of going off a cliff, but the current system is at least not preventing the unemployment rate from reaching surprisingly healthy lows, wages to start growing a bit, or corporate profits from reaching obscene highs.

At some point, Democrats will (assuming that our constitutional democracy survives Trump and the Republicans) regain power and will then able to pass tax legislation. There are many good progressive ideas out there, and Democrats will have to decide which ones to embrace as they attempt to overcome the complacency of a system on autopilot.

At the very least, Democrats (and independents, and even conservatives who have given up on the current Republican Party) can now say to congressional Republicans: "Where's the fire? What justifies your rush to pass something without even knowing what you're passing?"

Even putting aside the simple fact that Republicans' preferred tax policies would all push the country in the wrong direction, the fact is that time is on our side. Sometimes, we actually do need to act right away, because the risks of inaction outweigh the risks of going off half-cocked. Fortunately, this is not one of those situations.

The Republicans' haste is not based on anything in the real world that would require quick action. They are giddy that they have a president who will happily sign any tax cut that they pass, so long as they can figure out a way to agree with each other and put enough fig leaves on their plan to make it a tiny bit less than completely embarrassing.

Everyone but true-believing Trump/Republican extremists should simply do everything possible to block this legislation. It is a travesty in every way, and the best news is that doing nothing does not carry any risks. There will be time for real progress later.

For now, just as they did with their health care bills, the Republicans are doing everything they can to undermine their own credibility, and everyone else should simply say no.

Neil H. Buchanan is an economist and legal scholar and a professor of law at George Washington University. He teaches tax law, tax policy, contracts, and law and economics. His research addresses the long-term tax and spending patterns of the federal government, focusing on budget deficits, the national debt, health care costs and Social Security.

Join the Discussion