Retirement and Social Security Reform
Congress Refuses To Fix A System That Is
Enemy Of Common Sense
Investor's Business Daily
July 12, 2005
By Ernest S. Christian
Here we are in the summer of 2005. The dog days
are almost upon us and, alas, the tax code still has not been
The report of the President's Tax Reform Advisory Panel has
been postponed until September, and some of the faithful are
beginning to despair. Perhaps it's the heat. Maybe the reform
will come next year, they say, or maybe in the next Congress,
or maybe never, according to some.
It is time to remind ourselves why we entered this swamp in
the first place: The tax code (all 20 pounds of it) is economically
destructive and a danger to the Republic.
Like much of the federal government of which it is emblematic,
the tax code has a rule for just about everything that exists
and some things that do not, such as "passive activity."
(That's no joke.)
On the big issues that drastically affect the size of the
economy and the lives, jobs and well-being of millions of
people, the tax code does everything wrong. Invariably, it
does exactly the opposite of what common sense says is in
the best interests of the American people.
Even a short list of the tax code's countless inanities is
appalling. It favors consumption over saving, imports over
exports, foreign investment over domestic, mindless paperwork
over genuine productivity, and high rates of tax over high
rates of GDP growth. These and other bad influences exerted
by the tax code do not exist in a vacuum. They have powerful
consequences that feed on one another to produce even worse
results in a dynamic world economy.
Because we Americans save and invest too little, we produce
too little and consume too much; and because our consumption
is too high relative to our production, our imports are too
high and our exports too low; and because we import more than
we export, we must borrow from foreigners; and if we borrow
from foreigners and also continue to consume too much, we
must repay them with part of our savings; and when we deplete
our savings, it is harder to invest and produce.
At a time when the personal savings rate in the U.S. has declined
to the point of almost disappearing, would anyone in his right
mind deliberately set out to double tax (and in some cases,
quadruple tax) saving? Of course not, but that is what the
tax code does and has been doing for many years.
Businesses and their employees are challenged by global economic
forces that require that American-made products be produced
with maximum efficiency. Why then does the tax code put an
extra heavy tax on productivity-enhancing machinery by forcing
manufacturers to recover their costs by slow depreciation
instead of rapid first-year expensing? Is it government policy
to deindustrialize America?
It is essential that U.S. companies be able to compete all
around the world by direct participation in foreign markets
and by exports from the U.S. - but the tax code goes out of
its way to make it hard for them to do either one.
France and other EU countries insist that we impose taxes
on exports in a way that makes it hard for U.S. companies
to sell American-made products to the EU. But when EU countries
export their products to us, they do not tax them at all (and
neither do we). Why does the Congress acquiesce in this one-sided
farce that puts U.S. companies at a disadvantage?
When U.S. firms go abroad and build plants in lucrative foreign
markets that they cannot serve with exports, the tax code
denies them an even chance to compete with others seeking
to gain a share of those markets.
Many U.S. companies still succeed handsomely in foreign markets.
But when they make profits abroad, the tax code does the most
stupid, anti-American thing possible: It penalizes them if
they bring their profits home for reinvestment in America
but rewards them with a tax benefit if they reinvest their
money in a foreign country. A tax executive of one such company
was recently heard to remark, "We just got our 35% tax
credit from the IRS in payment for reinvesting our money abroad."
Power Of The Code
Today's Congress would not as an initial matter enact a tax
code so clearly designed to harm America - but it refuses
to fix it. And so does just about everyone else. Right now,
except for President Bush and his advisory panel, the chairman
of the Ways and Means Committee in Congress and a few old-line
tax reformers in think tanks and universities, there are not
many people bent on reforming the tax code.
At best, the business community is phlegmatic on the issue,
and most of the big business players in Washington are outright
opposed to tax reform. And not many members of Congress are
eager to give up much of the power, authority and political
fundraising ability that the present tax code's complex system
of rewards and punishments affords them.
Congress has become quite adept at granting enough carefully
targeted dispensations and indulgences to prevent a tax revolt
- and perhaps to prevent tax reform as well.
Businesses tend to look at the tax code solely in terms of
the amount of tax they must pay out of their profits rather
than at the way the tax code reduces those profits by harming
the economy. Thus, the Congress has been able to buy off enough
favored companies, large and small, by granting them special
exceptions to the tax code's antibusiness rules - thereby
letting them pay less tax than some of their competitors.
By carefully calibrating personal tax rates in combination
with specialized deductions, Congress has also been able to
keep a working majority of voters reasonably satisfied, gradually
taking huge chunks of them off the income tax rolls altogether
and making others grateful for their "refunds" at
the end of the year.
(Never mind that Congress has perpetuated a tax code that
has cost many of them their jobs and lowered standards of
living for almost everyone for several generations.)
In addition, Congress has moderated some of the most severe
penalties on economic growth. Tax rates have ceased to be
confiscatory and are now simply too high.
Bit by bit, small amounts of personal savings have been allowed
to escape from the double-tax penalty - but only in restricted
circumstances and primarily for retirement.
And since 1960, when tax depreciation rates were so slow as
to be almost nonexistent, Congress has grudgingly allowed
businesses more reasonable rates of depreciation for manufacturing
equipment. In the recent economic recession, Congress even
allowed partial first-year expensing, but then took it back
at the end of last year.
Congress is aware of the damage the tax code is doing to America.
And Congress knows how to fix the problem.
The American people should demand that Congress get on with
the job before more trillions of dollars of GDP are lost,
before more jobs are lost and, in the case of some industries,
before it is too late.
If the members of Congress do not act, the voters should hold
them all to account in the next election.
Christian is a former Treasury tax official who is director
of the Center For Strategic Tax Reform in Washington, D.C.