Congressional woes

The deal we passed to avoid the fiscal cliff left a lot to be desired in tax code reform.

Derek Olson

 

The year 2012 came to a close with a nail-biting climax: after two months of accelerating anxiety in the markets and awkward business preparations for the New Year, we averted the fiscal cliff. But should we be so relieved?

At least we can relax until our representatives play the next game of chicken. I’d say we have a couple weeks of peace before the statement ensues over the debt ceiling, or maybe that’s just wishful thinking. These stalemates are beginning to look more like my freshman writing class; back then the name of the game was called “who’s the most brazen procrastinator?”

Civilized societies aren’t supposed to worry that the leaders of their country are inept. Yet, this opinion has been in vogue lately as congressional approval ratings remain abysmal. A recent poll by the Huffington Post found that Congress was less popular than cockroaches, Genghis Kahn and replacement referees. But hey, at least they scored higher than gonorrhea.

Comic relief aside, the shocking thing is how many of these dismally approved members of Congress won elections just two and a half months ago. There were 390 incumbent members of Congress who chose to run for re-election last fall, and more than 90 percent were re-elected. That figure is even higher than it otherwise would have been due to the redistricting that took place; a few incumbents had to race against other incumbents.

Somehow these legislators keep dodging their checks on accountability. America is fed up with the Congress as an aggregate, yet not willing to vote in new representatives. What we really averted was a chance, albeit a diminutive one, at a productive legislature.

Tax reform — it’s a big deal. Vicious fights rage over whether to raise the rates on the richest income earners, but there’s one issue that everyone agrees on: The tax code needs to be simplified. Economists have been saying for decades that tax reform needs to broaden the base and lower the rates. While some may favor raising the rates, no one, especially no economist, is out in favor of a further complicated tax code. Yet, that’s what our legislators keep giving us.

In 2010, President Barack Obama put together the Bowles-Simpson commission to address the nation’s medium- and long-term fiscal problems. Though the findings of the small, bipartisan cohort were never adopted, their plan was extolled by many across the political spectrum. On tax reform, they came to the same conclusion: lower the rates and broaden the base. The commission would have done it in a manner that raised $785 billion, about $100 billion more than the cliff deal will raise.

The cliff deal did just the opposite. It raised the rates and narrowed the base by extending dozens of deductions and credits and creating a slew of new ones. So many of these new cracks in the code are puzzling at best: $78 million for owners of NASCAR race tracks and $222 million for rum distillers, just to name two. Let’s give a big round of applause to former Sen. Chris Dodd, now the all-star lobbyist for Hollywood. Film and television producers can expense the first $15 million in production costs, $20 million if they occur in “economically depressed areas.” I wonder how far a good lawyer can stretch the definition of “economically depressed.”

The American Taxpayer Relief Act, as the cliff deal was named, ushered in about $40 billion in deductions, credits and exemptions for all those who can afford a lobbyist. Despite rhetoric from the president and others about preventing the rich from exploiting loopholes, we got exactly the opposite: an affirmation to every big campaign contributor that their political investments are worthwhile. Why invest in new technology when a sizable campaign donation will save millions in taxes?

All of these special treatments are hurdles to economic growth because they distort business decisions. Businesses spend money on armies of accountants and lawyers who find them every crack to slip into and lobbyists to create new cracks. We haven’t had a thorough cleansing of the tax code since the Tax Act of 1986. Two and half decades of built up molasses is clogging the pipes of our economy, stalling growth and job creation. The road to serfdom is paved with deductions and credits.

Politically though, it’s pretty difficult to clean out the goo. What politician wants to turn their back on their donors to do something the voting public isn’t even paying attention to? Average Americans shouldn’t need to worry about the nitty gritty details of other people’s taxes or whether their representatives will resolve deals in the wee hours of the morning. But there’s a serious problem beneath the simple debate over how high our tax rates should be. The higher the rates, the bigger the payoff of finding special exceptions and creating new ones. As more exceptions get created, the more the need grows for higher rates to finance the government. What a great cycle.

Reasonable people can disagree about whether the tax rates should rise, but where is the justification for all this extraneous special treatment? It’s indefensible. It’s the “Boardwalk Empire” model. Although we’d like to believe it, those corrupt days aren’t a thing of the past. Instead of the fiscal cliff, we chose to go off the crony cliff. I think I might have preferred the former.

On a more positive note, most of the deal was only extended for two years. So we’ll just have to wait until the next stalemate before they get renewed again. Keep up the good work Congress; I’m looking forward to the next showdown.