Not Learning from Experience: The Dangerous Path for Tax Reform by Rob Ketcham

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Are we going to witness the Republicans mounting another policy blitzkrieg, only to fall on their face as they ignore lessons that should have been learned?

As I write this, national attention is being directed by the President and Congressional leaders about a “tax overhaul”, a proposal for a sweeping rewrite of the tax code to reduce tax rates for corporations and individuals and eliminate some popular deductions.

The last major federal tax upgrade was enacted in 1986 and was years in the making. The process followed the path of what is referred to as “regular order”; legislative activities that involve the tax writing committees in the House and Senate, hearings, gathering information on impacts of the propositions being proposed, debating the propositions in the committees, ultimately reaching agreement on a legislative proposition to take to the floor where it may be debated further and amended, passage in both chambers and then, finally, a Conference Committee to settle the differences before the final agreement can be voted on in order to become law.

This process is almost never easy or speedy. A legislative history I am intimately familiar with, The Space Act, was signed into law on July 29, 1958, eight months after the Soviet launch of Sputnik on October 4, 1957. The Select Committee formed to write the bill was said to have “performed its tasks with both amazing speed and skill.” Players included the House Majority Leader John McCormack, Senate Majority leader Lyndon Johnson, Gerald Ford, a future President, and Les Arends, the Republican Whip. The give and take between the Democratic Congress and the Republican Administration (which had its own strongly held ideas about what the Space Act should look like) became a healthy exchange involving Bryce Harlow, Deputy Assistant for Congressional Affairs, and Ed McCabe, Administrative Assistant to President Eisenhower. This arrangement evolved into a daily exchange under “…the stress of time requirements and pride of authorship”so that everyone was kept in the loop, White House, House, and Senate. In other words, everyone worked together.

I wonder if today’s elected Republican leaders truly understand the enormous legislative effort they have pledged to take on this September. It is, in a word, daunting. The simple facts are that this is: (1) a new Administration which came to power rather unexpectedly, and (2) a Congress with a Republican Majority that has not legislated in the tax area for more than twenty years, I’d guess that very few Republican members have ever served as an advocate for any such a massive legislative undertaking— their chosen role for most of their careers has been to be opposed to whatever proposition was being forwarded for their consideration. As a further complication: the key players, the President, and legislative neophytes Treasury Secretary Mnuchin and Chief Economic Adviser Cohn are not familiar with the give and take involved in the legislative process, and continue to behave as though the Congress is a forum to make demands and power through until the other side caves.

The Administration’s tax overhaul proposal contains very little detail about the impact of the legislation on anticipated revenues gained and lost and the impact on the deficit in the short and long term. But facts still matter, and when taxes are being discussed and changes being made that affect most everyone in the country, individuals and businesses alike, legislative changes must be made in a fiscally responsible way based on the best information and analysis available.

The current lack of information and specificity appears to be an attempt at obfuscation and is drawing much commentary in the media. It is true that looking at something such as the tax overhaul proposal which has such potential large economic consequences does offer the real possibility to come to different conclusions based on the assumptions being made. A debate in the tax committees, hearings and testimony would help the legislators. For example, today’s news about inflation and the interest rate and the Federal Reserve Governors differing views illustrates this.

If the Republican Congress and the White House try to come up with a rewrite of the tax code and then attempt to ram through their proposition without consensus it is doomed to failure. Probably even more than with health care, everyone is affected in their pocket or on their ledger, from the highly paid Washington lobbyist to the tax payer just barely making ends meet, and every business in the economy, from Goldman Sachs executives to the small businessmen and women who are aware of how every tax affects their bottom line.

So, to close a loophole for one person is to create an additional tax liability for someone else. If the mortgage deduction is reduced, as an example, then the individual deduction would, all things being equal, be raised proportionally. Lowering statutory tax rates on businesses requires closing “loopholes” which means that someone who presently has the loophole will lose. Since tax cuts must be offset by revenue-raising measures, it matters greatly how the tax cut is paid for. Merely holding the line on increasing a deficit could mean there would be cuts in basic programs such as those for low and middle-income wage earners.

Two sacred cows that bring in considerable revenue are marked for extinction: the A.M.T. (alternative minimum tax) and the Estate Tax. Both proposals give more than a hint of who the beneficiaries will be. It was reported by the NYT on Sept 28, 2017, that the alternative minimum tax forced Mr. Trump to pay $31 million in additional taxes in 2005. The Estate Tax affects only the wealthy these days— estates worth more than $5.49 million ($10.98 million for a couple). Proposals for these sacred cows, if agreed to be eliminated, loom large because of the lost revenue which must then be made up in some other way. In other words, to benefit a few of the wealthy, there is a real possibility that the middle class and the poor would lose as the balance is tilted against them.

The dearth of information at this beginning stage about the effect of the tax reduction proposal could be deliberate, or it could reflect a lack of appreciation of how to propose legislation. For example: tax policy in America has contained an unwritten principle as reflected in the present code; progressivity—which means that the lowest tax rate which is for lower-income workers ranges from 10 percent, to the highest bracket for the very wealthy which is presently 39.6 percent. Nothing I have read so far pays any lip service or provides helpful information on this important point.

At some point in the legislative process, in order for a bill is taken seriously, the Congressional Budget Office undertakes the task of scoring the proposal, which simply means it is charged to put numbers to the proposal so the legislators will know the financial impact of what is being proposed, such as revenue gains or revenue losses. Doing the scoring came up during the health care debate and seemed an anathema to the Senate Majority Leader at least during its consideration.

All persons who are following the proposed rewrite of the tax code will need to be quite vigilant that the estimates are made by those reliable to make them. Trying to skirt this requirement and projecting positive economics because of the old saw that reducing revenue to business expands economic output just should not be allowed to happen. A good example follows of some of the hype used by proponents in the recent past. In an article in the NYTimes of 9/27/17 entitled Will Tax Holiday Generate Jobs? It Didn’t take a Decade Ago, Eduardo Porter writes that the tax break approved by a bipartisan majority in Congress in order to repatriate billions of dollars stashed overseas at 5.25 percent (instead of the corporate rate of 35 percent) was supposed to create more than 500,000 jobs in the US over the next two years. In point of fact, the jobs did not come in. The corporations who took advantage of the tax break did flow $299 billion in corporate earnings back, “but it did not result in an increase in domestic investment, domestic employment or R&D” the article states. “Promises, promises… ”

And just a word on bipartisanship. President Trump had dinner recently with “Chuck and Nancy” (the Senate and House Minority Leaders) at a time when things were unraveling over the debt ceiling: surprise! The President and Chuck and Nancy reached a deal that got everyone past the immediate crisis. As I write this there is news that a bipartisan group of legislators in the Senate who serve on the Senate Health, Education, Labor, and Pensions Committee have held hearings on stabilizing Obamacare insurance marketplaces, and have gathered input from some of their colleagues and are bargaining over the outlines of a deal which could stabilize the insurance marketplaces. Some reforms are being discussed, states would be given more freedom design and experiment, and even a lower level “copper” health insurance plan is being talked about. These events give me some hope—since if I learned one thing on the Hill it is when the members finally decide to do something and work together they find a way to do it.

I can only hope that today the Joint Committee on Taxation is as professional and competent as it was when I served on the Hill. At that time the committee had a deep bench of very able non-partisan staff headed by a Staff Director of impeccable credentials. Such experience and institutional memory are invaluable when taking on a task like tax reform or overhaul.

It seems almost inconceivable to me that the Republican Congressional leaders and the Administration would try yet again to legislate on a partisan basis. While I am very much in favor of improving the tax code and think it is long overdue, I just hate to think that so much effort could just be squandered by a group of Congressmen and the White House who appear not to have learned anything from their past failures, and who have not yet assumed the mantle of true leadership which requires working with everyone in order to achieve a result worthy of everyone’s best efforts.


Bob Ketcham served as the chief of staff of the US House of Representatives Committee on Science, Space and Technology and staff director of the Fossil and Nuclear Energy Subcommittee during the 1980s and 1990s. Prior to those positions, he was Special Counsel to the House Select Committee on Committees chaired by Richard Bolling (D-MO).  He holds a BA and JD from Washington and Lee University as well as a SG from Harvard University’s Senior Managers in Government Program. He has lived on the Eastern Shore since 1999 with his wife, Caroline.

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Letters to Editor

  1. Frederick Patt says:

    Very well written. Two points in the text got my attention:
    “Since tax cuts must be offset by revenue-raising measures…”
    “…lost revenue which must then be made up…”
    The (admittedly minimal) information on the proposed changes suggests that the administration and the Republican leadership in Congress, in their zeal to ram through tax reform, are not concerned with whether the changes are revenue-neutral. We also need to remind ourselves that, during the previous eight years, this same leadership called attention almost daily to the “out-of-control” increases in the federal deficit and national debt.

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