WHY HEALTH CARE AND TAX REFORM ARE SO DIFFICULT
Martin Lobel
People outside the Washington, DC bubble keep asking why health care and tax reform are so difficult even though the President has made health care and tax “reform” his top priorities and everyone “knows” that Obamacare and the tax code are too complex, burdensome and inefficient. The answer is both simple and systemic and poses a real threat to the Republican leadership. The discussion so far has confused tax cuts for the rich with health care and tax reform and does not deal with our real economic problems. Moreover, Congress, as is shown by its attempted “reform” of Obamacare, is unable to deal with all the conflicting powerful interests unless there is a crisis. All the health care and tax “reform” proposals that have surfaced so far are DOA because they offend too many powerful interests and will significantly increase the deficit. Not to fear. The next economic crisis won’t be long in coming because of the inability of the White House to govern while companies are finding it more difficult with rising interests rates and debt to borrow to pay for stock buy backs and dividends and the market is beginning to realize that Trump’s promised tax rate cut isn’t likely to happen.
The leveraging of the corporate balance sheet has basically supported stock market prices and dividends, but not long-term business investments. Corporations are engaged in financial engineering by issuing debt and buying back their shares to increase their dividends. But it does not increase the growth potential of the U.S. economy. The Fed is largely responsible for this because QE was designed to give the stock market a boost. The idea was to create a wealth effect that would then trigger spending and faster economic growth. But, like the tax cut proposals, the idea of a wealth effect is no more than a hypothetical theory, which doesn’t work.. If it had, we would not see the severe deterioration in secular growth that’s taking place. The net result is that the Fed and Republican promises to cut taxes encouraged corporate managers to pile on debt for their own financial benefit, not the economy’s. From 2015-2016, debt rose $717 billion. But investments in plant, equipment and inventories fell by $21.2 billion.
The discussion so far has focused on how to cut taxes and who will benefit from the cuts. But focusing first on cutting taxes and government is the wrong way to approach the problems we face. We must first decide what government functions we want and then fund them through the most efficient and effective taxes, i.e. those that raise the money needed with the least disruptive effect on the economy. Right now we are facing an aging population and growing entitlement costs together with a rapidly increasing deficit. Do we believe that “deficits don’t matter” or do we want to cut entitlements like medicare, as the Republicans propose, or raise taxes to pay for them?
The notion that cutting taxes on the rich will stimulate growth is overwhelmingly rejected by economists. A recent poll by the University of Chicago showed that none of the economists it surveyed believed that a tax cut now would stimulate growth in part because we are finally almost at full employment. Indeed, wherever it has been tried, all it has done is increase deficits. Look at Kansas. Governor Brownback cut business taxes substantially, promising that it would result in increased revenue, jobs and business growth. Instead, it has resulted in a $948 million deficit, underfunded education and crumbling infrastructure which has caused businesses to flee the state and the Republican legislators to reverse course and raise taxes to fund education, infrastructure, etc..
Unfortunately, although the media continues to call the current Republican party agenda “conservative,” most of the Republican leadership in the House act like plutocratic puppets.. They have embraced a theological belief that the solution to every problem is to cut taxes on the very rich, who, not incidentally, fund both parties, and to cut back government despite the lack of evidence supporting their position and what happened in Kansas which implemented this theology. This dependence on plutocrat funding may explain why the Democratic Party has been unable or unwilling to effectively counter the Republican position. Feeding the very rich and letting the rest of the population feed on what has passed through their digestive tract does not make for a healthy economy or democracy.
As the godfather of economic conservatives, Milton Friedman, used to point out, government should not pick winners and losers, particularly with hidden subsidies in the tax code. Our tax code is a disgrace. It was designed by powerful interests, but makes little economic sense. It is too complicated and provides too many unjustifiable subsidies to too many powerful interests who have invested in well connected lobbyists to convince congressional staffers - all too many of whom are short timers trying to become highly paid lobbyists - to persuade their bosses to support complicated tax subsidies. Their bosses are by and large too busy fund-raising to pay attention to details. One survey found that most Members of Congress spend 4 hours a day dialing for dollars. Unfortunately, this is the rational consequence of our current political system.
In my years on the Hill, I never met a businessman who didn’t believe explicitly or implicitly in the free market but who had a “special situation” that demanded either protection from competition or a government subsidy. Powerful interests know that the benefits of a tax subsidy will far exceed the return from any investment they can make in the market and will expend all their political capital to keep them while the general public either does not know about them or doesn’t care nearly as much about eliminating that particular tax subsidy. As Anthony Downs pointed out in his classic book, An Economic Theory of Democracy, Congressmen, whose currency is votes, know that by supporting these subsidies they can raise the money to buy the media necessary to get re-elected. Unless, of course, their constituents discover what they are doing, in which case they are more likely to do what they think their constituents want. But, this is increasingly unlikely because the number of journalists who can alert those constituents has declined sharply in recent years.
The clearest current example of an attempt to get unjustified subsidies is the Brady bill, a/k/a the Border Adjustment Tax, being pushed by the multinational corporations which would exempt from taxes all the earnings they claim they earned overseas while imposing what is essentially a VAT which would shift the tax burden to the middle and lower income groups and make domestic companies uncompetitive against multinationals.
As Milton Friedman suggested, the best solution is to eliminate all business tax subsides and lower rates because that’s the only way to overcome the opposition of those who benefit from the subsidies. Alternatively, we need to adopt one of the other reform proposals that make more sense, e.g. adopting a unitary system of apportioning income and taxes, eliminating deferral of taxes on “foreign” income, treating shareholders like employees for withholding taxes, eliminating the difference between corporations and pass through entities, etc. Unfortunately, most of the thought leaders among the tax reformers are wed to reforms based on correcting transfer pricing abuses, which every IRS Commissioner who has testified before Congress has admitted cannot be policed. One of my partners likened it to chasing speeders on the New Jersey Turnpike on a bicycle. Perhaps that is why the Republicans leadership in the House is so adamant about cutting the IRS budget. Cutting it because you hate taxes is stupid, unless, of course, you want to cripple government or protect your big campaign contributors from being audited. Any businessman will tell you a $1 investment that returns between $4 and $15 (depending on how you calculate it) is a great investment, which is the return earned by every dollar invested in the IRS.
We need to reform how Congress functions. Since Gingrich started his holy war, Republicans and Democrats have been unable to communicate with one another and reach rational solutions to far too many problems. When I was working in the Senate, people on opposite sides of issues could almost always talk. It was hard to hate someone when they and their families lived in Washington, playing and eating together. We need to end the Tuesday-to-Thursday club to encourage families to come to Washington. One story epitomizes the difference. Senator Phil Hart, the great liberal from Michigan, was excoriating Senator Jim Eastland from Mississippi in a speech on the Senate floor for being a despicable racist when Senator McClellan from Arkansas came out of the cloakroom, heard what was being said and started to raise a point of order because of the personal attack when Senator Eastland grabbed him by the sleeve and said, “Sit down. I asked him to do it. It will help me win the election back home.”
If Republicans in the House had been able to talk with Democrats, perhaps they could have avoided the embarrassment of, after 7 years and over 60 votes to abolish Obamacare, being unable to either abolish it or craft an improvement. Only with the President’s active involvement was the Republican leadership in the House finally able to force their own members to narrowly vote for what appears to be a press release bill that no one had time to read or get the Congressional Budget Office estimate of its impact and which appears to be DOA in the Senate. What happened to their promises of regular order, of having hearings and giving Members time to evaluate proposed legislation?
If we don’t change our economic policies, we will face a revolution from the middle class, something that Jefferson and Madison warned us about when wealth is highly concentrated. For over 35 years, the middle class has been the victim of government policies that shifted income to the top 1%, (most of which actually went to the top 0.01%) and to the financial sector that almost doubled its share of GDP by financial manipulations that lined its pockets but added little to the economy. As Paul Volcker once noted, “The most important financial innovation for the consumer in the past 20 years was the ATM.”
History shows that government policies are best seen as a pendulum. For the last 35 years the pendulum of government policy swung in favor of the plutocrats. Now the pendulum is beginning to swing back. The middle class unhappiness with their economic plight resulted in President Trump’s election. He won, not as a representative of the Republican Party, but as an outsider against the “Establishment” epitomized by Hillary Clinton. If, as seems likely, he cannot fulfill his promises and the economy has a significant correction, the results will not be pretty. It’s like building a dam. Unless you create a spill way to channel the pent up energy of the water, eventually the dam will burst and sweep away everything below it.
The responses to post-election polls show that one of the biggest problems we face is our inadequate educational system. Most responders never understood the issues because all too often students are not taught the information they need to know or how to analyze problems; too much emphasis has been placed on making them feel good about themselves. The current classic example is the move by some colleges to set up “safe spaces” so students can hide from ideas that might offend them. The purpose of education should be to challenge students to confront and analyze ideas so they can think for themselves.
Of course the influence of the plutocrats is not limited to taxes. It also affects criminal law. Attorney General Session is trying to increase the sentences on low level drug dealers while the Republicans in Congress are trying to eviscerate the already inadequate laws holding white collar criminals responsible for their actions: prohibitions against class actions, forced arbitration, and incredibly complex statutes. When I asked a friend, who represents financial institutions, whether his clients would suffer after the Dodd-Frank Act passed, he responded, “Hell no. We will eviscerate it during the enactment of the necessary regulations when no one is watching and I’ll be able to pay for my grandchildren’s education. Besides, we can always outgun the Justice Department lawyers.” Is it any wonder that no high ranking financial official has been held responsible for the fraudulent behavior that caused the crash of 2008. They were able to hide behind their corporate structures because the Supreme Court deemed corporations to be “persons” in Citizens United. As Jim Hightower once commented, “I’ll believe corporations are people when Texas executes one.”
Enough cynicism. The question remains. Is medicare and tax reform possible? I think the answer is yes. But it will take a crisis and the media will have to educate the public about the underlying issues and expose the attempts to secrete hidden tax subsidies. I was once told by one of the leaders of the tax bar that Lee Sheppard’s articles in Tax Notes alone saved the taxpayers over $3 billion in unjustifiable tax subsidies.
Tax and health care reform will require increased taxes, not tax cuts for the wealthy, to pay for the government that people demand, like health care for the increasing number of elderly. It will also have to level the playing field for domestic and multinational corporations and between the rich and the middle class. All these provide long term benefits for the economy by lowering the deficit, increasing investment in productive activities in education and infrastructure, etc. Unfortunately, these do not provide the short term benefits sought by those who make the bulk of campaign contributions so the media is going to have to be much more aggressive about covering these issues.