Tax Reform: Unexpected Casualty

Tax Reform: Unexpected Casualty

The problems with the Obamacare rollout had one consequence that few anticipated

The bungled rollout of Obamacare revealed consequences of the historic healthcare law the American public didn’t anticipate, such as the cancellation of millions of insurance policies that failed to meet the law’s standards.  Whether these consequences should be considered “unintended” is a complex question because it’s increasingly apparent that the administration knew more about the fallout from the law than it originally shared with the public.  But one consequence that nobody in Washington, D.C. was anticipating is that the healthcare law would kill off the chances for any other major legislation to pass during the rest of President Obama’s term in office.  Yet, that’s exactly what appears to be happening, and one of the key casualties is tax reform.

The odds of a comprehensive tax reform bill were never particularly high.  Reform will require difficult trade-offs between cutting tax rates and eliminating deductions.  Nonetheless, the tax writing Ways and Means Committee has been working to fashion a bi-partisan proposal designed to tilt the current Tax Code in a more pro-growth direction.  That effort continues, although it’s been properly conducted behind closed doors.  At this point, however, Congress is both consumed and paralyzed with the Obamacare rollout, effectively eliminating any chance that legislation as complex and controversial as tax reform could even be proposed before the 2014 mid-term elections.


Bad News for Economy

This is truly bad news for an American economy attempting to fight against structural headwinds that are slowing its recovery from the financial crisis.  The Tax Code contains embedded incentives that favor debt over equity financing, speculation over productive investment and contribute to the widening wealth gap in this country.   Obamacare itself significantly increases the tax burden on businesses in order to pay for its new entitlements.  In high tax states, high earners are paying well over 50 percent of their income to the federal, state and local tax collectors, and even those who benefit from unjustified loopholes such as the “carried interest” tax in private equity are still paying significant amounts of taxes (although at least the latter can afford it).

More generally, the structure of the Tax Code – high rates with many deductions – creates an environment that promotes government intrusion into private business transactions.  The country would be infinitely better served by a simpler Tax Code with lower rates and fewer deductions that allowed the markets rather than the government to pick winners and losers.  But that’s not going to happen, at least not during the Obama presidency.  Congressional Republicans are focused with laser-like intensity on Obamacare as the leading political issue for 2014.  That means that tax reform – as well as immigration reform and other important initiatives – won’t see the light of day until 2017.  And that’s not a misprint.  There won’t be any significant legislative initiatives in the final two years of the Obama’s presidency.  His opportunity to accomplish something big in his second term has been squandered by a series of scandals starting with the National Security Agency, and the Internal Revenue Service and has now been buried by Obamacare.

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