Obstacles to Tax Reform

In the previous posting I discussed three different proposals that are currently on the table for reforming our current tax system.  We looked at the Fair Tax, Flat Tax, and the 999 plan.  Any of these plans would be a definite improvement over the current tax plan.  However, as with any change, there will be resistance.  In this posting we will be looking at some of the major obstacles we are likely to encounter as we strive to reform the current tax code. 

First, we will encounter resistance from the tax preparation industry.  I am a tax preparer and work for one of the major tax preparation companies during the tax season.  I work at this job during the tax season as a second job to earn extra discretionary income.  In fact, today I am leaving on my vacation using money I earned this past tax season.  I say this because even though reforming the tax code would likely eliminate my second job, I am interested in the good of my country and believe these reforms will create economic growth making it possible for me to earn the discretionary income I want without having to work a second job. 

Even though traditional tax preparation companies such as H&R Block, Jackson Hewitt, and Liberty Tax have seen a decline over the past couple of years, (1) this is most likely due to the introduction of new technologies that enable taxpayers to prepare their taxes online or use tax software purchased at their local office supply store.  As the tax code becomes even more complicated due to the implementation of Obamacare, I believe the traditional tax preparation companies will experience resurgence as taxpayers become concerned with making a costly mistake on their return. 

The introduction of a flat or fair tax threatens to eliminate the need for the traditional tax preparation industry.  There may still be a market for software to fill out the short form using a computer but these programs will be very simple thus reducing the price people would be willing to pay for these software packages.  Facing extinction, we would expect the traditional tax preparation companies to band together and lobby Congress to maintain the current complicated tax system. 

However, if voters speak out for reform in great enough numbers, the threat of losing an election will far outweigh the threat of losing campaign contributions from tax preparation companies.  Therefore, to overcome this obstacle, we need massive numbers of voters to speak out for reform. 

Another point of resistance to reform could come from those who fear the loss of refundable tax credits such as the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit.  Many low-income families have grown to become dependent on these credits, which allow someone who has zero tax liability to receive a large refund in excess of any withholding taxes they paid.  These credits amount to a transfer of money to these people using the tax code. 

In my previous posting I mentioned that the Flat Tax preserves the EITC so their fears are unfounded if we implement a flat tax.  However, the fair tax does eliminate the EITC but it also eliminates all withholding taxes including FICA and Medicare.  These individuals will also receive a prebate check and will benefit from reductions in prices as companies can cut their prices due to not having to pay corporate income taxes anymore.  We also have to consider the dynamic of economic growth that will occur raising personal incomes, thus relieving individuals of dependence on government handouts like the EITC and Additional child Tax Credits. 

Finally, we have to deal with objections from lawmakers themselves.  The current tax code allows politicians to essentially buy votes by offering tax incentives to preferred constituencies while punishing disfavored constituencies.  (2) This is why we have seen the tax code grow each year and why it has now become a leviathan that threatens to choke our economy and as we have seen from the recent IRS scandal erode away our personal liberties.  Add to this the enforcement of Obamacare by the IRS, and we have a formula for disaster as politicians have even more opportunities to use the tax code to garner political favors. 

So, how can we convince lawmakers that benefit politically from the complex tax code to vote for its elimination?  Simple, we must come out in numbers large enough that the threat of losing our votes will mean losing their jobs.  To put it in a way these politicians can understand, they can buy our vote by voting to replace our current tax code with either a fair or a flat tax. 

Changing the tax code, as with any change, will have obstacles but they are obstacles that we can overcome.  We can alleviate fears of lower income people by maintaining the EITC in the flat tax and then explain how the economic growth due to the enactment of the Fair Tax will raise their incomes to where they no longer need to be dependent on the EITC.  By showing up in massive numbers at tax reformation rallies, we can convince politicians that the greater threat to their positions is in us not voting for them and not in the loss of contributions from tax preparation lobbies or contributions for favors offered to favored constituencies.

Next, we will look at what we can do to take action to initiate tax reform.  

1. Diligence.com, Magic. Has the Tax Preparation Industry Lost Its Luster. www.magicdiligence.com. [Online] Alexander Online Properties, March 16, 2010. [Cited: June 7, 2013.] http://www.magicdiligence.com/tax-preparation-industry-2010-03.

2. Anthony Davies, James R. Harrigan. How Pols Learned to Stop Worrying and Love the Impenetrable Tax Code. www.usnews.com. [Online] U.S. News and World Report, October 15, 2012. [Cited: June 7, 2013.] http://www.usnews.com/opinion/blogs/economic-intelligence/2012/10/15/why-politicians-dont-want-to-simplify-the-tax-code.