Jan 25 2014

Is meaningful tax policy reform possible?


Reform Party of California Commentary

On occasion, especially during elections, some politicians and candidates for congress or president promise tax policy reforms which typically refer to tax code changes. That has been the case for years, maybe a few decades. Analysis of tax data suggests that the U.S. treasury loses over $400 billion per year to tax evasion, which is illegal non-payment of taxes owed. A reasonable estimate is that unknown hundreds of billions per year is lost to tax avoidance measures that congress never intended, but which are nonetheless legal. Tax policy changes could significantly alter the situation, but the chances of that happening appear to be very low at best.

To the Reform Party of California (RPCA), indefensible, incoherent tax policy is one of the most persuasive factors, maybe the single most persuasive, that the two-party system, congress and the White House is not really serious about improving America’s fiscal situation. The sheer magnitude of the money that could be collected from tax evasion alone, probably  $320 to $350 billion/year,  is strong evidence that there is insufficient political will for either tax code reform or collection of most of what is due. Collecting tax revenue that is owed to the U.S. treasury is not a matter of raising any new tax and thus it should not offend conservative political anti-tax ideology. As for liberal political ideology, there is nothing obvious that would render either reasonably effective collection of taxes owed or tax code reform necessarily objectionable.

The circumstances here include a federal debt well over $17 trillion[1], federal spending heavily subsidized by new debt and hundreds of billions of dollars/year in “free” money that is allowed to simply vanish. Collecting at least some of the owed money does not require tax code reform, but it is nonetheless not done. Given that, it is fair to conclude that the two-party political system uses the tax code for payback for campaign contributions. If collecting what is owed is an unattainable political goal, then asking for real tax code reform is even less attainable because bipartisan cooperation would be needed in addition to the political will to overcome resistance from lobbyists who fight to maintain the status quo on behalf of their clients.

The RPCA is not alone in seeing tax policy as difficult or impossible to touch in any meaningful way. On Dec. 12, 2013, C-Span broadcast a Q&A interview with Marty Sullivan, the chief economist for Tax Analysts, which is a non-partisan, non-profit provider of tax news and analysis with about 200 employees.[2] Dr. Sullivan, a well-known analyst and former republican, is no longer affiliated with the democratic or republican parties. His focus is on communicating intelligent tax analysis to his customers and the public without partisan political baggage. The 59 minute interview focuses on tax avoidance tactics, which Sullivan has studied in detail (key comments on tax avoidance tactics are are at 2:15 to 6:20), but other topics including tax policy issues are also discussed.


A couple of critical points regarding tax policy jump out from the comments that Sullivan makes in his C-Span discussion. At 14:35 to 16:13 of the C-Span broadcast, Sullivan points out that congress is simply incapable of making reasonable, sensible changes to the tax code in the face of lobbyists who overpower congress as an institution. As Sullivan puts it, congress is “swarmed” by tax lobbyists who argue that proposed, common-sense tax code changes will “be the end of the world.” Congress just caves in and nothing changes.

At 16:15 to 20:00, Sullivan argues that campaign contributions to key people in congress are not nearly as powerful as is the capacity of lobbyists who are technical tax experts to influence the writing of the tax code. That process is not normally subject to press scrutiny. Even if the press did decide to try to understand what was going on during legislation, the details likely would not be fully understood. In essence, it appears to be the case that the process of writing tax law is done behind closed doors between congressional staffers and special interest lobbyists who know far more about tax code matters than congressional staffers. It is no surprise whatever that the tax code is littered with tens or hundreds of billions of dollars in tax breaks that congress neither intended or even understood in the first place.

Despite claims by key politicians that tax policy reform is likely in a given legislative session, Sullivan argues in comments at at 25:35 to 27:18 that such sentiment grossly overstates the odds of change by about 10-fold, i.e., if the congressional committee chairpersons say there is a 50% chance of reform, the reality is that there is about a 5% chance. The reason Sullivan gives is that when congressional chairpersons propose meaningful tax policy reform, that necessarily includes the bad news, i.e., who is going to pay for closed loopholes. When those details become known to the business community, they do not like what they see. That presumably triggers the swarms of stinging lobbyists who argue the world is coming to an end. In fact, all that ends is the political will and congressional capacity to pass any meaningful tax policy reform.[3]

Finally, at 30:30 to 31:28, Sullivan argues that democratic and republican politicians “both do a lousy job” regarding tax policy, despite the fact that republicans at least talk about the topic more than democrats and they try to elevate the importance of reform. In Sullivan’s opinion, unless there is a self-interested motive, most democratic politicians just do not care enough to try anything. Sullivan’s point that tax policy reform is not sufficiently important for meaningful tax reform to happen is a point the RPCA has argued repeatedly.

Obviously defenders of the two-party status quo will reject Dr. Sullivan’s version of reality as nonsense, misguided, self-serving and/or otherwise simply wrong. So, who are you going to believe? You decide. While you are deciding, consider these two arguments. First, every year that passes under the status quo, the U.S. treasury loses another, say, $500-$600 billion in revenue to criminal tax evasion and unintended tax avoidance, with some, about one-third at present, of that amount financed by increasing federal debt. Second, that accumulating debt and lost treasury revenue decreases America’s GDP growth by, say, 0.7% to 1.0% annually. If those arguments are wrong, it would be nice to see the unspun data and unbiased analysis that refutes those two assertions. Such data and analysis probably does not exist.


1. On the books federal debt is over $17 trillion and off the books debt amounts to about $85-90 trillion that will come due in the next 30-40 years or so.

2. The information that Tax Analysts generates is among the best sources, maybe the best, for understanding tax law and policy. U.S. tax policy and its tax code is blindingly complex. Attaining a reasonable grasp of the issues for a lay audience requires resort to politically unbiased expert analysis and opinion.

3. This is not meant to be a criticism of special interests or their swarms of technical expert lobbyists. They are doing exactly what they are supposed to do. It is the job of special interests to defend their special interests. It is the job of congress, not the for-profit business community, to protect the public interest. When it comes to tax policy, which is urgently needed and has been for years, congress is AWOL.