Why Tax Reform Is So Difficult, But Necessary

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If there is one thing that both Republicans and Democrats can agree on, then that would be the need for tax reform.  Unfortunately, their paths to achieving true reform are drastically different.

Even though it is acknowledged that cutting taxes on the wealthy will boost economic growth because they will likely invest in capital that will yield a higher rate of return, most of those benefits will revert to the highly skilled.  In America, unstable family structures and declining public education are creating an unhealthy division between those with marketable skills versus those without.  By simplifying the tax code and diverting new revenues to boost education and workforce development, we can help diminish the skills gap.

A simpler tax code will require strong political will with three particular entities posing as significant obstacles.  Those three entities include the middle class, non-profit organizations, and corporate lobbyists.  In order to achieve a simpler tax code, there must be a reduction in tax expenditures, which come in the form of exclusion, deduction, and deferral of tax liability.  Even though a simpler tax code would reduce burden and increase efficiency, it could potentially increase inequality.

One of the main avenues to achieving a simpler, more efficient tax code would be to reduce the mortgage interest and charitable deductions.  Reducing the mortgage interest deduction would be very unpopular to the middle class, yet it would extract the most tax revenues that could be reinvested back into the low- and middle-income households in order to boost their workforce skills.  By reducing the tax benefit for giving to charities, that would threaten a key revenue source for non-profit organizations and make it more difficult to distribute needed resources to the most vulnerable of populations.

Even though it is more symbolic because its cost is not as high as the mortgage interest and charitable tax deductions, it is more politically feasible and market-enhancing to limit the various corporate tax credits and deductions currently available to industry.  Certainly, those businesses with the political connections to craft legislation to benefit their industries will be harmed as a result.  However, it would allow less politically connected industries to compete on a more even playing ground, since their tax liabilities would be more similar.  In that case, innovation, customer service, and product quality will be the determinants of success, rather than governmental kickbacks and subsidies.

In order to enhance our workforce, a two-pronged attack is necessary with quick fix solutions for updating adult skill sets to adjust to new economy needs and more investment in early child education.  Older workers must change their mindsets toward technology and correct a perception among employers they are not trainable.  Rather than pursue expensive graduate degrees with questionable value, adults should consider acquiring certifications in specialized fields, such as computers or health care.  By upgrading funding to local Department of Labor centers, citizens would gain greater guidance and make better career choices.

As for schools, they must find ways to increase academic performance despite inherent challenges.  This must start with better parental training and access to early childhood education resources.  Even though the U.S. spends a significant money on educating students on a per student basis, there is a problem with how it is allocated.  More resources need to be devoted to identifying and treating learning disabilities at an early age in low-income schools.  There also needs to be strategies in addressing discipline problems where a small group of disruptive students can drastically affect the learning of all of the other students.  Until those two issues are addressed, then closing the skills gap will be cost-prohibitive and futile.

Each of these workforce development initiatives will require more funding, so it is important that tax reform be achieved to enhance rather than reduce tax revenues.  This can still be done without raising rates, but it will require sacrifice from three key constituents: the middle class, non-profit organizations, and corporate lobbyists.

When people wonder why tax reform is so difficult, consider this.  Prudent tax reform would be political suicide for legislators to support because Americans are more interested in their selfish pursuits rather than the collective pursuit of a broader, prosperous nation.