Advocates of comprehensive tax reform in the United States should expect to start over in the next Congress due to the dim prospects that anything major will happen before the current legislative year ends in December, a key U.S. senator said.
A lack of consensus on tax reform issues and relatively little time to advance any legislation — without the long-shot possibility of becoming an amendment to a broad budget bill — leave little hope to make any progress on the short term, said Sen. Benjamin Cardin, D-Md. Whether you agree with Sen. Cardin’s politics or not, he is one of the lawmakers in Congress who has taken a strong interest in tax issues throughout his political career and he has the ear of Senate Finance Committee Chairman, Sen. Ron Wyden, D-Ore.
Any effort to reform the current U.S. tax code is a nearly “impossible task,” Sen. Cardin said.
I once interviewed then-Rep. Cardin with a few other journalists on a Sunday morning news program on WJZ-TV 13 in Baltimore when I was the business editor of a daily newspaper there, and I asked him at that time about alternatives to the current unpopular tax system. I learned that his staff at the time was looking into the value-added tax commonly used in Europe as a possible substitute for the U.S. income tax.
Since then, he sought and won election to the U.S. Senate, as well as crafted his plan as a “progressive consumption” tax that would eliminate income taxes for 90 percent of U.S. taxpayers. Many conservative readers will cringe at the word “progressive” involving any tax reform proposal, just as liberal readers would object to any change in the tax system that they view as leaving the so-called “rich” — however defined — not paying enough.
The good news for both sides is that our political system does not allow legislation to be passed unless a majority of the members of Congress are willing to support it. At times, gridlock on a specific issue serves a purpose — if simply to focus lawmakers on pursuing important matters that need to be addressed, such as budget issues, and putting proposals that have no chance of passing this Congress on the backburner to consider another time.
Thankfully, hearings, studies and research by staff members allow issues to be explored before any legislation is passed. The non-partisan Congressional Budget Office (CBO) also can give opinions on what potential changes in revenue-collecting activities could mean for the budget and the annual federal deficit.
Lawmakers who are willing to reach across the political aisle to gain input and ideas from members of the other political party often are those who have served in state legislatures. Sen. Cardin is one such lawmaker, so he is in a position to know when tax proposals stand little chance of advancing because he talks to both Democrats and Republicans about their views. As someone with his own ideas about what should be done, he has a vested interest in figuring out how best to devote his time and the time of his staff.
Sen. Cardin recalled a time 15 years ago when he accepted an offer from then-fellow House member and now Sen. Rob Portman, R-Ohio, to team up on a bipartisan effort to modernize the Internal Revenue Service (IRS), make the agency more consumer-friendly and give it additional resources. Traditionally, the Ways and Means and Finance Committees support the IRS, while the appropriators never make it a priority, he added. A certain amount of progress was made, but it lasted for only about two years, Sen. Cardin told attendees at an Atlantic Tax Summit last Tuesday in Washington sponsored by H&R Block.
“My point is it’s hard to get Congress to focus long term on support for the tax-collecting agency of the United States government,” Sen. Cardin said.
The last time the tax code was simplified occurred in 1986. Tens of thousands of changes have taken place in the tax code since then, Sen. Cardin said.
Sen. Cardin favors the regulation of tax preparers in the United States, as well as boosting tax revenues. Increased regulation and plans to boost tax revenues generally gain immediate opposition from conservatives but Sen. Cardin said he is hoping to win broadened support for his proposal by wiping out income taxes for the vast majority of Americans.
When lawmakers pass a tax law change that has winners and losers, Sen. Cardin said he learned as a state legislator in Maryland that the winners will send you thank you notes and soon forget your name, while the losers will never forget you. For that reason, the politics of attempting any kind of tax reform is “very difficult,” he acknowledged.
“I really think we need a fundamental change in our tax code,” Sen. Cardin said.
The United States is the only country that relies on income tax revenues rather than consumption tax revenues, he said. However, Sen. Cardin also said the United States is losing jobs and becoming less competitive due to its high marginal rates.
“With a progressive consumption tax, we can have the lowest marginal rates in the industrial world,” Sen. Cardin said. The bottom U.S. consumption tax rate of 10 percent and a corporate tax rate of 15 percent would be the lowest in the industrial world, he added.
Sen. Cardin said his tax plan would exempt those who earn $25,000 to $50,000 from paying a consumption tax. The top consumption tax rate would be 25 percent, he added. Those who earn under $100,000 would not pay any income tax — leaving just 10 percent of Americans paying income tax if the consumption tax is adopted.
The only four deductions to be allowed on income tax would be for charitable giving, mortgage interest, employer paid health and retirement benefits and state and local taxes.
Since consumption taxes are border-adjusted, U.S. businesses that compete internationally will benefit, he said. Foreign companies now pay consumption taxes that are border adjusted and leave U.S. companies at a disadvantage, he added.
A cap also could be set to limit the potential revenue that could be generated from a consumption tax, Sen. Cardin said.
Sen. Cardin’s consumption tax would raise revenue by taxing goods and services, using a broad base, in which as many products as practical would be subject to the tax. His consumption tax also would:
- Employ a credit-invoice system letting a consumer pay a tax on sales, but gain a credit for any consumption tax previously paid on purchases from other businesses;
- include imports; and
- be destination-based, so any goods that are exported would not be subject to the tax and exporters would receive a credit for taxes previously paid on their products.
Additional revenue expected to be produced from the progressive consumption tax would be used to offset a reduction in the corporate tax rate.
To stay true to his progressive ideals, Sen. Cardin proposes to counter regressive distributional effects of a consumption-based tax by giving low- and middle-income families, yet to be specifically defined, relief through payroll tax offsets and other transfer payments from the federal government. He would scale those breaks to a family’s size and phase it out for high-income households.
Whether you agree with Sen. Cardin’s ideas or not, he is a key person on tax issues for the political party that now has majority control of the U.S. Senate. He also has spent 20 years developing his tax plan and recently shared his ideas with Finance Committee Chairman Wyden. Of course, the flack received by Rep. David Camp, R-Mich., for his recent tax proposal shows the challenge of winning support for changes, Sen. Cardin said.
As you await your tax refund, try to finalize your tax returns by the April 15 deadline or possibly fume about how much of your hard-earned income is going to the government for programs you may dislike, you can count your blessings that you are not a lawmaker trying to simplify and reform the tax code. The odds of making inroads are long and fallout is hitting those such as Rep. Camp who try.