TO bring House Republicans good luck in passing their replacement for the Affordable Care Act, a.k.a. Obamacare, Rep. Pete Sessions (R.-Texas) wore a brown suit to the chamber, in honor of President Ronald Reagan.
After the vote was pulled from the House floor, Republicans in Washington moved on to the next big thing, which is tax reform. They may be about to prove again that dressing like the Gipper is easier than governing like him.
Though there long has been some bipartisan agreement that both corporate and individual income-tax rates could be cut and loopholes eliminated, Congress has not pulled off a tax reform of the type now being contemplated since 1986—and that one almost failed.
Compared with other rich countries, the most striking thing about taxation in America is its complexity. Since that 1986 tax reform, the number of carve-outs in the tax code has multiplied, part of a bigger change in the way Congress does business. Where once the passage of bills was smoothed by including federal money for pet projects in congressmen’s districts, tax breaks are now the preferred lubricant.
The growth of the federal tax code, which has tripled in length in the past 30 years, often is cited as proof that the country is overtaxed. Its size reflects all those special tax breaks, however. For individuals the exemptions turn a tax system whose headline rates are redistributive, by rich-world standards, into one which is not.
The same is true of corporate taxes. The top marginal rate of 39% is an outlier by international standards: The Organization for Economic Cooperation and Development’s average is 25%. In some ways this was made worse by the 1986 reform, which shifted taxes from individuals onto companies, which at the time seemed less able to avoid them.
Although the high top rate may deter investment, it does not reflect the tax bill American companies end up paying. Between 2006 and 2012 two-thirds of companies paid no federal tax, according to a study by the nonpartisan Government Accountability Office. Large companies that were profitable paid a federal tax of 14% on their net income between 2008 and 2012, according to the G.A.O., a rate that rose to 22% once state and local taxes were included.
In the case of both individual and corporate taxes, Republicans tend to look at the headline rates and agree that they need to come down, which is the basis for the optimism among their caucus that tax reform is easier than health care.
Those rates are not what they seem, however. Bringing them down would require some combination of closing exemptions, increasing the deficit and borrowing.
The House tax plan drawn up by Rep. Paul Ryan (R.-Wis.), the speaker of the House, and by Rep. Kevin Brady (R.-Texas), who chairs the Ways and Means Committee, proposes getting rid of some exemptions granted to taxpayers but leaves alone two of the biggest—the deductions for mortgage interest and for charitable giving.
© 2017 Economist Newspaper Ltd., London (April 1). All rights reserved. Reprinted with permission.
Image credits: Stephen Crowley/The New York Times