The campaign promises on taxes came so fast and furious, you probably have the lines down: “The Trump plan will lower the business tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax”; “The Trump plan will collapse the current seven tax brackets to three brackets”; “Everybody is getting a tax cut, especially the middle class.”
Of all the promises candidates make (and often break), none is as extreme as when it comes to taxes.
But don’t blame the candidate. Seriously. Promises are no match for politics. Or even procedure.
Simply put, one person cannot simply change a tax code that everyone agrees needs changing. At least, that was the feeling of our panel at the NJBIZ First 100 Days panel on taxes, finance and insurance, held recently at Shackamaxon Country Club in Scotch Plains.
Michael Greenwald, Certified Public Accountant and partner at Friedman LLP; Frank Brunetti, counsel and partner emeritus of Scarinci Hollenbeck; and Frank Jones, partner at Mints Insurance Agency, all agreed that changes (and plenty of them) are necessary.
Then they explained why President Donald Trump (or any other president) would have a hard time doing what the candidate Trump made sound so easy.
“The current IRS code does have nearly 10,000 sections,” Brunetti explained, and this stat alone was enough to make people pause. “I don’t see how tax reform, per se, provides any benefit, because, more likely than not, unless you really study the impact of each and every change you are going to make, you are going to have serious dislocation in the economy. In my view, the only way to really have tax reform is to deconstruct the tax code piece by piece.”
Then, Brunetti dropped the biggest line.
“It was constructed piece by piece,” he said.
And that’s a big problem with reform, our experts said.
The panelists talked about how there are still a number of “arcane provisions” in the code, ranging in size from small (individuals can deduct $20 from their income if they ride a bicycle to work) to big (oil and gas companies have been getting a subsidy for nearly 100 years to encourage them to search for more oil and gas).
“Tax reform requires serious study of many of these provisions and then determining, if we eliminate them, what are the consequences and so forth,” Brunetti said. “So, when Trump says, ‘I’m going to have the biggest tax cut in history and massive changes,’ I take that with a grain of salt because, the more I see it, it is nothing more than tweaking here and tweaking there.”
Jones, for one, wondered if any changes could really have impact. Outside of the claims of political victory.
The tax system is so large, he said, it historically has been impossible to move.
“Every time we’ve had a tax change, people have celebrated on one side or the other,” he said. “But, when it comes to the revenue of the federal government, it’s not really swayed much.
“So, what we would really need, if people really want to see tax cuts happen, are substantive tax cuts that would affect the revenue of the federal government and the expenses. We’re not going to see that.”
Not that big changes always work.
Greenwald gave a historical rundown of past attempts to undertake the problem: in 1939, 1954 and, most recently, in 1986, he said.
“It’s about time to do it again,” he said. “It’s about time to go through and clean everything up and make it fresh and clean and better.”
Greenwald said the massive changes are a way of “cleaning out the dead wood” in the tax code.
“(It’s time to remove items) that were designed to solve a problem that no longer exists but are still on the code and cause nothing but grief for taxpayers and tax preparers, with no discernible purpose,” he said.
Of course, doing so can lead to unintended consequences.
That’s what happened in 1986, our experts said.
That reform took years to create, with bipartisan participation (imagine that), and then years to pass (with more bipartisan add-ons to get enough votes). When it did, it ended up doing more harm than good, our experts said.
“It probably caused the savings and loan crisis that came about a year or two later,” Greenwald said. “Part of the problem with major tax reform is that taxes are so pervasive in our economy it’s hard often to gauge what the unintended consequences will be, what the collateral aspects of it are.”
The experts hadn’t had enough time to truly vet Trump’s initial proposal. But Greenwald, from a big-picture perspective, already feels it doesn’t go far enough.
“Any time they are just changing rates and maybe one or two other things, I have difficulty calling that tax reform,” he said. “That’s really just wealth redistribution, depending upon which way you think wealth should be redistributed.
“But it’s not really tax reform, because they are not looking at the tax code as a whole. They are just taking pieces of it and trying to make changes to it that will satisfy campaign promises or satisfy donors.”
Which leads us back to the campaign promises.
Greenwald hopes Trump’s initial proposal will go a long way toward keeping those promises. And, once the proposal fails, he hopes it may start some honest dialogue.
“My hope is that, if this thing goes down in flames, at least it will open the door to real, serious work,” he said.
Brunetti seconded the motion.
“I couldn’t agree with you more,” he said. “Dealing with the code every day and dealing with so many sections that really don’t have any use anymore (doesn’t make sense).”
Change, however, is not easy.
“It can’t be done over tweets and thinking about it over campaigns,” Brunetti said. “It requires study by tax professionals, economists, insurance people, financial people, it has to be a joint effort to determine what is appropriate to the country as a whole.”
That, according to Jones, is easier said than done. Blame it on the code, he said.
“For those who thought (Trump) was going to change the world, you underestimated the power of politics, as we saw with the potential replacement of the (Affordable Care Act),” he said.
“As we sit here, we have a tax code that allows for a $20 write-off for bicycle use. Think about it. How much time did it take for somebody to think that up and then have to have it voted on and put into the tax code. Think about how ridiculous that is.”
Some may say as ridiculous as a campaign promise.
— Tom Bergeron