Tax Reform Makes Bad TV But Good Public Policy

(Photo: Mark Wilson/Getty Images)

Pete Sepp President, National Taxpayers Union
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It was a safe bet going into last week’s Las Vegas debate among the GOP candidates that more details on their tax reform plans wouldn’t show up on the table – and not just because the focus of the debate was national security. Nor should we have expected to hear anything more substantive from the trio of Democratic candidates when their debate aired from New Hampshire over the weekend.

Terrorism is certainly a central concern of voters, but the economy remains a top worry too. What’s behind that worry? Uncertain job security, an anemic real estate recovery, a shaky stock market, and the sense that America’s most prosperous times are behind us. Our dysfunctional tax system contributes to all of these problems, and while candidates from both parties agree this threat must be confronted, the only consensus on tax reform seems to be that it lacks the entertainment value to hold a TV audience.

While some proposals we see on the campaign trail and in Congress have substance, a troubling number of them are designed to be soundbite-shallow; often they can be narrowly aimed at punishing one industry that’s in political disfavor. One such scheme, which manifests itself in several forms, is to target U.S. energy producers with a huge tax hike.

For example, leading Senate Democrats are pushing energy-policy legislation that would strip away tax deductions and cost recovery provisions from this industry. Such policies are extended in some fashion or degree to virtually all types of businesses, but they would be denied only to oil and gas producers.

This manipulation of the Tax Code would inescapably force a sharp increase in energy prices. In effect, this would be a massive energy tax increase felt by the whole country.  Its sponsors feel they can get away with this tax hike by incorrectly arguing fossil fuel producers don’t pay their “fair share” of taxes and ignoring the damage this would do to the economy.

This approach likewise ignores National Taxpayers Union’s basic premise of tax reform, which contends that government shouldn’t pick winners and losers with tax policy. We understand that the road to real tax reform will be long and complicated. But the necessary implements for making that journey come down to just three:

  • Simplify the U.S. Tax Code
  • Make tax reform industry-neutral and apply it uniformly
  • Ensure that the tax system strengthens American competitiveness

The case for simplifying the Tax Code practically makes itself. The statutes are about seven times the translated length of War and Peace. It is cluttered with provisions cherry-picked by special interests. Just navigating this labyrinth cost us over $230 billion in out-of-pocket expenses and lost productivity for the year.

Industry-neutral tax reform means putting an end to using the Tax Code as a trough to both feed politically connected allies … and choke politically disfavored ones. The Senate’s energy tax attack is an example of the choke approach. It is not only unfair, but ludicrously misguided.

For more than a decade, energy companies have led the economy in creating jobs, delivering healthy returns to retirees and other shareholders, as well as paying taxes. Oil and gas companies shoulder an average effective tax burden of 37 percent, compared to 29 percent for the overall S&P 500.

Unfortunately, our illogical and compromised tax system puts U.S. business in general at competitive disadvantage in ways both obvious and subtle. America has the highest business tax rates in the industrialized world. We are the only country in the G-7 group of nations that uses the outdated worldwide tax system instead of the territorial system, which means U.S. companies’ overseas earnings get hammered with U.S. taxes.

So our tax system today is a self-constructed barrier to economic growth. It needs to be demolished and replaced with a simple and fair system where no one gets special treatment but everyone pays lower rates. That’s not a fantasy; that’s real tax reform.

Pete Sepp is President of the National Taxpayers Union.