Did you know that the District of Columbia has assigned officers to enforce its police-your-dog laws? The Poop Police. How low do you have to go, how badly do you have to screw up to be assigned in the District of Columbia to the Poop Police? Do they go under cover? Do they pack heat? In risible juxtaposition to this Singapore-like nod to order and governance, we see our Congress attempting to do tax reform. What a mess. As I write this, the Tax Conference Committee has apparently settled on something and we will likely see a vote in both Houses this week. The belly-scratching, horse trading, posturing and the manufacturing of sly optics…ugh. At least it is almost over. Something to be said for that. It was a sorry exercise.
Oh, don’t get me wrong. I’m certainly not carping about the fundamental value of doing tax reform. While the economic theories of both the left and the right seem tattered and largely unhinged from economic outcomes, I can warm up to trying this tax reform thing. For me, at least in a crayon-and-construction-paper- third-grade sort of way, simplifying the tax code, embracing of a territorial tax system for corporations and reducing the corporate top line or marque tax rate while eliminating some of the excrescences of special interest goodies to offset the revenue impact seems like a pretty good idea. Maybe it won’t work, but continuing to do what we have been doing (that being not experimenting with tax reform) seems like the definition of insanity: doing the same thing over and over again and expecting a different outcome. And, hey, if it doesn’t work we can take comfort that it will provide wonderful opportunities in schadenfreude for the likes of Professors Stiglitz, Krugman and Summers.
So why am I disconsolate? First, it’s because the simplification effort largely seems to have gone out the door. President Trump had trumpeted (sorry) his policy of eliminating two regulations for every new one and trying to prune away the regulatory brambles. But here? For every bit of tax reduction it seems we will add two new nifty, complicated exemptions, exclusions or special rules. Tweak upon tweak upon tweak.
We’re always told and we acknowledge, with a shrug of the shoulder and an arching of the eyebrow in a so sophisticated way, that we understand that legislation is sausage making and perhaps best not observed too closely. But I couldn’t help myself and I looked into that dark place and indeed it was fairly harrowing.
I’m not even sure we got a sausage.
Look at the mess on interest deductibility. Let’s go back to Econ101 and recognize that many main street economists from both the center left and the center right have always said that interest deductibility was a somewhat intellectually challenged notion. It picks winners and losers and creates added incentives to finance with debt. We all know what happens to exuberantly assumed debt when markets get stressed. Moreover, there is a significant consensus that making primary residence interest deductible truly torques investment decisions and incents middle America to buy too much house and invest too little in other asset classes. We also know how that worked out.
So, trading trimming interest deductibility for lower rates would make intellectual sense. What did they do? Well, first they cap interest deductibility on home mortgages at $750,000 (classic baby splitting). Then, on business debt, they cap an entity’s deductible interest at 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization). But wait, not for commercial real estate. Debt secured by commercial real estate retains its unlimited deductibility. Again, given what I do for a living, I’m not complaining, but really? This is simplification? And, as I write this, it is not at all clear that interest on debt which in turn is secured by real estate mortgages would be limited or not. What happens to warehouses? And think how gloriously complex the process of defining such things as a real estate business or even terms with currency in the accounting world like EBITDA? I’m not even going to think of SALT (state and local tax).
The list goes on and all. They’ve taken the current version of the Internal Revenue Code which is near to collapsing under its own complexity, and after their Julia Child in the kitchen routine, what have they whipped up? …A dog’s breakfast. Yes, some deductions have gone, some credits have gone, but plenty of credits remain, plenty of deductions remain. Plenty of new wrinkles too! Complexity continues to rule (tax lawyers rejoice)! Is anyone (I mean the relatively few that actually pay tax) going to be file their personal tax return on a 6×8 return mail card? I don’t think so. And yes, more citizens will apparently not have to pay any tax at all (which, I guess, is a form of simplification), but somehow, further narrowing the base of taxpayers who support the federal government does not seem like terrific public policy. And wasn’t one of the things this tax reform was all about broadening the tax base? Oh well. I’m tired of thinking about it right now and I will henceforth refuse to be annoyed by the logical inconsistencies, bizarre and Rube Goldberg-ish compromises and the horrid cynicism on display. I will wait for a final bill to be disgorged onto the President’s desk and signed. When that is done, I will try not to obsess all over again on the fundamental absurdity of our tax code, but I bet I will.
Gives me stuff to write about anyway.