Despite the largest GOP congressional majorities in decades, lawmakers made virtually no progress over the past seven months toward overhauling and simplifying the federal tax code, a goal both parties have insisted is a high priority.
Now, with presidential politics dominating the news, the likelihood of anything substantive to emerge in the current Congress appears very remote, according to the leader of the nation’s largest grassroots taxpayers organization.
In December 2014, in the wake of the “cromnibus” controversy, National Taxpayers Union President Pete Sepp believed the table was set for meaningful, beneficial reform, but that Republicans needed to act quickly.
“I would say no more than 6-8 months (to get it done). If we don’t see packages reported out of the House and Senate tax writing committees by the spring, we’re going to be in trouble,” said Sepp last year.
As Congress stand in recess, no tax reform plan has come before a House or Senate Committee. According to Sepp, the only progress is a report from a working group under the auspices of the Senate Finance Committee.
Translation: A golden opportunity was missed to make life easier for families, individuals and businesses.
“Congress remains stuck on the first step of that path, not holding hearings, not having votes. This, unfortunately, is not very encouraging. We will not likely see a comprehensive individual and business tax reform plan this year,” said Sepp.
Tax reform is not considered a top tier issue in the 2016 campaign and there were no questions about it at the first GOP debate. Sepp says that’s a big mistake. He says there’s no time to lose because our current code discourages employers from starting or staying in the U.S. every day.
“It’s an absolutely urgent task, especially for the larger businesses, because they are the ones that not only have the means but the motive to do things such as inversions, relocating their headquarters overseas,” said Sepp.
“The rates and the differences in how the tax bases are defined and the huge compliance burdens that the U.S. tax system imposes on large businesses all incentivize them to go to tax-friendlier climates,” he added.
In addition to the sluggishness of Congress, Sepp says the process is getting bogged down by lobbyists trying to make sure their clients don’t get the short end of the stick.
“There are some interests in Washington saying, ‘Well, we don’t want to be the ones who get peeled first. Tax reform has to happen all at the same time and for everybody in the same phase-ins, same rates, same deductions, same years or we’re not buying it,'” said Sepp.
Any sort of “comprehensive” reform immediately raises a red flag for many on the right. But unlike, health care, banking or immigration, Sepp contends a comprehensive approach makes a lot more sense when it comes to taxes.
“With tax reform, the disparities can be so dramatic if you don’t try and do things comprehensively. You could have entire sectors of business or entire classes of individuals left with much, much higher tax bills than others. It’s already the case under the current system. It could get worse under a reformed system unless you handle the transition properly,” said Sepp.
Sepp applauds some of the Republican presidential contenders for advancing tax reform plans, namely former Gov. Mike Huckabee, R-Ark., and Sens. Marco Rubio, R-Fla., and Rand Paul, R-Ky. He says the most dramatic plan comes from Huckabee.
“If you’re looking for the most comprehensive tax reform, Gov. Huckabee has advocated a Fair Tax, which would replace the current system completely with a national retail sales tax, for a number of years,” said Sepp.
The Fair Tax faces two common criticisms: that it would not bring in as much revenue and that it unfairly hits the poor. On the revenue side, Sepp says there’s not much to worry about, although we would feel the pain on every purchase.
“It requires a rate of 23 percent (sales tax), which is quite high for many people’s taste, but that’s almost the rate that a middle class or upper middle class family would be paying in income and payroll taxes anyway,” said Sepp.
As for the alleged regressive nature of a consumption tax, Sepp says safeguards can be built in to protect low income Americans.
“The Fair Tax also protects lower income Americans by creating a prebate, that every household would get based on their size, so that purchases that would help them to maintain a standard of living above the poverty level would not be subject to tax,” said Sepp.
Sen. Paul favors a flat income tax rate of 14.5 percent, but he also advocates a Value Added Tax , or VAT, at the same rate. Sepp says that approach could get very expensive for taxpayers if Europe is any indication.
“Value Added Taxes can be very dicey propositions. Citizens in Europe have discovered that once such a thing is introduced, the rate tends to creep up, past 20 percent in most countries. Plus, the administrative burden is very difficult for many businesses,” said Sepp.
Sepp says if lawmakers every contemplate a VAT, there should be constitutional protections guaranteeing there won’t be any rate increases.
