Photo credit: Portland Press Herald, staff photographer

Why Not Do Tax Reform Right?

By: U.S. Senators Tim Kaine (D-VA) and Angus King (I-ME)

Major tax reform is one of the most important tasks of this or any Congress. What we do in the next several months will affect every American, every business and our entire economy for decades to come. Unfortunately, those in charge of the current process seem hell bent to pass something, anything, that can be called tax reform before an arbitrary Christmas deadline, with no real input from Democrats (or Independents), outside experts, states and communities affected, or ordinary citizens.

But it doesn’t have to be this way. There are a substantial number of Democrats who are prepared to engage in good-faith negotiations involving hearings, expert input, and compromise, to include cutting corporate rates and doing something about off-shore profits to stimulate economic growth. We believe that we can get to 70 votes, and probably more, for a more targeted (and less costly) alternative. The trick is to slow down, open up the process, and make sure we look before we take a thirty-year leap.

One of our greatest concerns about the current Senate and House bills is the long-term implication of the huge cut in revenues that both of these bills entail — which will only hasten the inevitable day of reckoning on the ballooning deficit and debt. Further, because we’re borrowing to fill the hole created by this lost revenue, these aren’t really tax cuts at all but are simply shifts of costs we’re unwilling to pay to our kids.

And all this deficit spending is being done in relatively good times, using up whatever cushion we might need for future economic downturns. Any rational business would be paying down debt now, not adding to it.

There are lots of important ideas out there that have not gotten a hearing in the current closed process, ideas that could really make a difference in economic growth without ballooning the debt or favoring one class of taxpayers over another. For example, our Republican Senate colleague, Ron Johnson, has pointed out that the engine of economic growth is the 80+ percent of American businesses that organize in ways (Subchapter S, limited liability companies and partnerships) where business income is simply passed through and taxed as ordinary income of their owners.

The current Senate Republican tax plan, by lowering corporate rates for the 20 percent of businesses that organize as Subchapter C corporations, does less for the small businesses that truly drive the economy. So Johnson proposes a simple solution. Instead of disadvantaging small businesses, treat all businesses the same by attributing the income of Subchapter C corporations to their owners and tax that income at personal rates. The details matter in getting this right, but the Johnson concept is worth a serious look.

Why do tax reform wrong? What’s the rush? All indications are that both the House and Senate bills would disproportionately benefit the largest companies and richest individuals while offering little to small businesses and punishing millions of middle class families. The proposals explode the deficits by at least $1.5 trillion — and the Senate bill would even dramatically increase the ranks of those without health insurance. This is why a strong consensus of economists has emerged that this particular tax plan will do little to promote a stronger American economy.

Surely we can do better. And we should do better. In 1986, Congress laid the groundwork for bipartisan reform with 36 hearings over ten months. The current Senate Bill was handed to Finance Committee members less than one week before the Committee was forced to debate and vote on its provisions. No hearings with experts, no opportunity for the public to weigh in, no real opportunity for Democratic members to persuade the Republican majority to improve the bill. And, we are currently scheduled to debate the bill on the Senate floor this week under a constrained procedure where a Senator offering an amendment is given one minute — one minute! — to debate the amendment before voting. A city council wouldn’t amend the leash law with a process like this.

We are former Governors — one Democrat and one Independent — who have worked on tax reform issues with legislators of both parties. We have recently been part of crafting bipartisan Senate legislation to stabilize the health insurance markets and also to better calibrate the regulation of community banks and credit unions. We know there is a path to bipartisan tax reform to spur economic growth and help hardworking individuals and small businesses succeed. If we miss the opportunity to do this right, we (and the entire country) are likely to regret it for years to come.

This piece is also featured in Axios.

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