Real Tax Reform Is About Trade-Offs and Difficult Decisions

The two of us, one a former CEO and the other a president of a nonpartisan budget watchdog, both strongly believe the current tax code needs an overhaul, including a corporate rate reduction. But the Senate just squandered an opportunity to pass meaningful, bipartisan tax reform. Instead, the Tax Cuts and Jobs Act is a fiscally irresponsible bill that fails taxpayers by adding to our already unsustainable deficit and debt levels.

Let’s start with the bill’s irresponsible increase of the deficit by $1.5 trillion over 10 years.  Despite low interest rates, this is a terrible time to massively increase deficits. The $20 trillion debt is already over 100 percent of GDP, the highest ratio since World War II. The projected growth of health care costs and interest payments on that debt are expected to increase deficits, and likely blow up the debt-to-GDP ratio in the coming decades.

Much of the deficit growth comes from the centerpiece of the proposal: the 20 percent “flat” rate for corporations. The current rate is 35 percent, but on average the effective tax rate for U.S. corporations is far lower, with many large corporations paying effective tax rates close to zero. Proponents of deep cuts to the corporate rate have long argued it should be paid for by eliminating thousands of pages of credits, deductions and special interest tax breaks.  But the current bill does not eliminate many of the largest deductions and credits, and expands rather than eliminates the Section 179 expensing deduction.

Next, the Senate bill allows most individual tax cuts to expire, masking the true cost of the bill. (The House bill also allows some individual provisions to expire.) But Congress has a terrible track record of keeping tax cuts temporary. 

Witness the 2012 “fiscal cliff” when the expiration of the 2001 and 2003 tax cuts coincided with triggers for automatic spending cuts under the Budget Control Act. Congress erased almost all the deficit-reducing benefits of spending cuts by making the “temporary” tax cuts permanent.  Moreover, the fact that the bill makes the corporate rate cuts permanent and many of the individual cuts temporary belies any assertion that the true intent of the bill is to help middle-class families directly.

Finally, all of these flawed policy proposals are advanced by claims that corporate tax cuts will result in more hiring and higher wages, especially for middle-income workers. That argument fundamentally disregards everything we know about hiring or compensation decisions.

Very simply, hiring goes up to meet customer or market demands, and salaries are based on what it takes to hire and retain talent and skills. In a job seeker’s market wages rise; in an employer’s market, wages are lower. Tax rates impact profitability, but are only very indirectly tied to hiring.  Today’s record profits in corporate America have not led to broad-based salary increases for middle-class workers.

Let’s also debunk the specious, gimmicky claim that a large corporate tax cut will put an additional $4,000 in the average family’s pocket. If one family on a cul-de-sac of 10 houses wins the lottery and gets $10 million, the average wealth of the group goes up $1 million but with no benefit at all to nine families.

So who would benefit from this tax package? The investor class. Tax cuts that increase profitability are great for the bottom line, but they do not result directly in increased demand or changes in labor markets. Absent those factors, corporations will likely use the additional profitability for stock buybacks and dividend increases.

Could corporate tax cuts indirectly drive hiring and wages by putting more dollars in the pockets of the owners of corporations? Past experience tells us no. If the goal is really to cut the taxes of middle-class workers, there are many more efficient ways to do so than this speculative bankshot. 

Congress should not squander this rare moment of universal agreement: The U.S. tax code is broken.  But real reform is about trade-offs. Lowering rates must be paired with a tangible offset recognized by scorekeepers of record. That means eliminating deductions and opportunities for gamesmanship, which would in turn allow us to lower rates without increasing the deficit, resulting in a fairer, more efficient tax system.

Congress needs to do the hard work of making those difficult decisions, not ram through a terrible bill in the middle of the night.  Our respective experiences in business and in Washington inform our shared view that this package should be shelved.

Ryan Alexander is president of Taxpayers for Common Sense. David Mendels is the former CEO of Brightcove, an online video company. 

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