Don't mix tax cuts into tax reform

Tax reform is in the air.

Republicans now have the opportunity, through their legislative control and governors’ chairs, to propose alternatives to a tax system created in 1986 and patched and amended ever since.

In Washington, the talk about comprehensive tax reform is just that – talk – but some changes are possible.  Most of the focus appears to be on the corporate tax rate.

In theory, the federal tax on corporations is 35 percent, a rate higher than in many other industrialized countries.  In fact, loopholes and special interest features lower the effective rate for large corporations to a more competitive level of 12.6 percent.

One of the key purposes of tax reform is to make rates fairer without raising revenues.  That should mean that if the federal rate is cut, some loopholes ought to be closed.

But, if the objective is to reduce government revenues or boost to corporations, the Republican proposal may be limited to cutting the rate.  That could give rise to a battle between President Obama, who would accept corporate tax changes, and the GOP-dominated Congress.

One other area in the corporate tax system is ripe for change.  Right now, corporations find it attractive to move their headquarters abroad, often more in theory than in terms of actual operations, but allowing them to avoid U.S. taxes.  That could be fixed by law with some bipartisan effort.

The federal “tax extender” law will once again have to be reviewed.  Usually left to the last minute and then not changed, this law contains a raft of tax breaks for various industries.  At this stage, it is difficult to know if Congress, taking advantage of a non-election year, will have the courage to cut some of these loopholes.

Finally, the Republicans can be expected to try to repeal the inheritance tax, which they call the “death tax.”  It is intended to make sure that the wealth of the wealthy, who may have evaded taxes, can finally be taxed.  The GOP is unlikely to succeed.

States often simply duplicate the federal tax system, though at lower rates.  But there is room for reform at the state level.

Maine provides a good example.  Gov. Paul LePage has made proposals that, in key respects, are more closely in line with past Democratic ideas than with his own GOP.  But he goes too far.

Maine’s top income tax rate of 7.95 percent is among the highest in the country.  LePage wants it cut to 5.75 percent, but would really like to see it go away entirely.  The cut makes sense; elimination does not.

The income tax requires those with higher incomes to pay higher rates than others down the income scale.  If it were eliminated, the burden would fall almost entirely on sales and property taxes that hit middle-income people more heavily than the wealthy.

A national study published this week supports the point that wealthier people pay a smaller portion of their income in state and local taxes than the rest of the people.

LePage sees the income tax as outmoded.  But government, even if slashed, costs money.  Roads and bridges urgently need repair.  Eliminating the income tax would make it more difficult to meet basic needs. 

To pay for his income tax reduction, LePage properly proposes sales tax increases.  Maine taxes fewer goods and services than most other states, and the governor would expand the list.  He would also raise the rate to 6.5 percent, keeping it well below rates in other states.

The principal obstacles are the need to limit the impact of the sales tax increase on lower-income people and resistance by businesses whose owners believe that the sales tax will keep customers away.

Yet, there is no evidence that sales taxes stifle sales.  Lawmakers need to ask themselves if they have ever refrained from making a purchase because of the tax.

LePage also wants to eliminate the estate tax, which mainly affects the wealthy.  While the federal inheritance tax should be retained, a good case can be made for ending its state counterpart.  The high income tax rate combined with the estate tax drive people from the state who otherwise could continue to contribute to its economy.

LePage’s proposals are not revenue neutral.  He wants to cut state taxes, so the burden would shift to the property tax and to hospitals, schools and other entities now tax-exempt.  By tying reasonable changes to controversial cuts, LePage endangers his own tax reform.

If the GOP will compromise and stick to real reform, this could be the year for change.

Business more efficient than government?

Sometimes it’s easy to see why people think government is too big.  Take a recent news report in Maine papers.

In many towns, to get a license to dig claims commercially, you have to do two things.  You pay the annual fee and you put in some time cleaning up and reseeding the clam flats.  This so-called conservation time is for your own benefit.

This practice has been going on the decades, and it works pretty well.  But then, along comes the Department of Labor – federal, state or both.  They say that when people are required by government to work, they become employees and have to be paid.

We are not talking about a lot of money here, because typically in each year conservation time takes only part of a few days.  Nobody forces people to dig clams, and shellfish harvesters understand the terms set by local government.

Government could spend less time investigating this harmless practice.  Instead, some towns will now raise their license fees and then pay rebates to the diggers in return for their conservation time.  Presumably, the diggers will have to pay taxes on the income, but for some the fee itself may not be a tax deduction.

This looks like government run amok.  The law, undoubtedly drafted by staffers with little real world experience, demands this process rather than exempting such small-scale practices.

Of course, a town could challenge government and face the consequences, but they could find it’s not worth the taxpayers’ money.

This is a small matter, but one that just about anybody can understand and conclude is ridiculous.  And that could cause them to oppose government regulation, even when it is justified, to say nothing of its government inefficiency and cost.

This is raw meat for opponents of government.  They argue that, if matters are left to the private sector, government excess will be avoided and the market, with its competitive forces, will produce sensible results.

For decades, General Motors was the largest automobile company in the world, a symbol of the success of the American way of doing business.  Its shareholders were well rewarded, and it was unionized, ensuring its workers were well paid.

When President Nixon asked the Israeli prime minister what she would want in exchange for a couple of her successful military generals, Golda Meir replied she would accept a couple of American generals, General Motors and General Electric.

GM came to believe that it set the standard and that whatever it did was the right thing to do.

Meanwhile, in Japan, automobile company leaders were listening to W. Edwards Deming, an American engineer, largely ignored in the United States.  He advised on a statistical approach to manufacturing with a heavy emphasis on increasing quality while controlling costs.

As Japanese production grew and its methods took hold, GM and other American carmakers ignored these developments.  More importantly, GM stuck to its own internal business practices as the world around it changed.

In 2009, despite having received federal aid, the company filed for bankruptcy.  To protect jobs and boost the economy, the U.S. and Canadian governments bailed it out.  On the U.S. side, the government put $49.5 billion into GM, but did not recover about $10.5 billion by the time GM ended government support in 2013.

The GM case, involving the pride of American manufacturing, supports the argument that big business can be as inefficient as big government.

But the problems with government may be inevitable, because we resist change.

Sen. Tom Coburn, an Oklahoma Republican who has just retired from office, asked congressional auditors to review all government programs to identify duplication and overlap.  It took the auditors three years, but they came up with hundreds of duplicate programs.

If these programs were simply merged, the savings would have been enormous.  But nothing happened.  Members of Congress want to bring federal money home, and that prevents efficient operations.  Even the toughest critics of government resist cuts in public spending that hurt their districts.

Of course, advocating smaller government may have nothing to do with efficiency, but simply be a way of lifting regulation from your friends and cutting programs favored by the other party.

Maybe the issue is bigness itself.  Institutions may grow so large that people miss the small mistakes, like the clam issue, that mount up to cause major problems, like a GM bankruptcy.

Whatever the reason, there’s no evidence that the private sector, through competition, would be any better at producing desired public policy results than is the government itself.

Now, the GOP must show if it can govern

This should be the best of years for the Republican Party.

It holds its largest majority since 1928 in the U.S. House of Representatives.It controls the governor’s chair and both houses of the state legislature (there only one in Nebraska) in 24 states.

If you add up the popular vote for House members across the country, the GOP reportedly won 40.1 million votes compared to 35.6 million for the Democrats.

In the U.S. House, its majority of 247-188 gives it control of the agenda, as does its Senate majority of 54-46, though neither has enough Republicans to override a presidential veto.

The Democrats are in bad shape.They control the governorship and both houses of the state legislature in only seven states.They cannot be assured that President Obama’s picks for federal office would be confirmed.

Why have the Republicans been so successful?Among the answers are their efforts to win state legislative races.They have poured far more money into the effort than have the Democrats.

Also, there were far more Senate seats held by Democrats contested in 2014 than those held by the GOP, though the situation will reverse in 2016.

Finally, as in most mid-term congressional elections, the president’s party lost ground. But the losses were deeper than usual, because of Obama’s low popularity.

Both the races for state legislatures and the U.S. House of Representatives were heavily affected by redistricting moves made after the 2010 census.A party in power can shape the legislative districts for the next ten years, and the GOP made sure to gain as much control as possible in state legislatures carrying out redistricting.

To be sure, in those states where they control or in the 19 divided states, the Democrats can influence legislative decisions.With their House majority, Maine Democrats will be in this position, facing a GOP governor and Senate.

Above all, the political balance will provide Republicans with an excellent chance to demonstrate their capacity to govern.

Many in the GOP had thought the 1980 election of Ronald Reagan as president would open the way to a lengthy conservative era, but the Democrats have won the presidency and legislative control in much of the period since then.

The Republicans have the opportunity in the next two years, by compiling a strong record and paving the way for the party’s 2016 presidential candidate, to resume their effort to install conservatism for the long haul.

The key to its success may depend on being able to shift from opposition to Obama and the Democrats to taking positive steps to govern.In other words, the GOP will have to be more than simply being known as “the party of ‘no’.”

Take just three examples.Republicans have persisted in going through the motions of trying to repeal the Affordable Care Act, though they knew they could not succeed.With a Democratic president, they still could not override his veto.

But they could come forward with proposals for revising Obamacare, taking into account its positive elements and the increased coverage for millions of Americans.It is unrealistic and probably bad politics to propose revisions that will strip people of coverage.

In fact, something less than a comprehensive reform might pick up support from Democrats, making it difficult for Obama to veto a bill.And that could show the ability of Republicans to work across the aisle, which many voters say they want above all from the two parties.

Much the same is true for immigration.While some Republicans believe the approximately 11 million undocumented people could all be deported, many, perhaps most, GOP members of Congress recognize this is impossible and politically unwise.

Obama’s unilateral immigration move could open the door to bipartisan legislative solutions, far more desirable than his broad use of presidential power.But his action may stand if Congress fails to agree.

Then, there’s tax reform.The tax extenders bill, the last major piece of legislation signed by the president in 2014, was mostly a collection of big breaks for large corporations.These loopholes reduced the supposedly high corporate tax rate.

The parties ought to be able to agree on eliminating loopholes and lowering the corporate tax rate.According to their rhetoric, they could even try to simplify the increasingly complex tax code.

What about the Democrats?For one thing, they should avoid becoming “the party of ‘no’.”

They need to offer positive policies and not mimic the GOP.And they need to make their case much better than they have in recent years.

Race a political factor, costing Democrats

Is race a factor in American politics?

That has been a tough question to answer, because in recent decades, people have become unlikely to express openly their views on race.  Academic analysis has found that people have a “tendency to withhold socially unacceptable attitudes.”

And, with the election of African-American Barack Obama as president, some people have come to believe that race as a political factor has disappeared.

But there are some clear indications that the historic American political issue of race remains alive.

In 1964, President Lyndon Johnson, a Democrat, signed the Civil Rights Act, which assured the equal rights of African-Americans, and promised federal government action to protect their rights.  When he signed, he reportedly remarked that his action would turn the South over to the Republicans for a generation.

The South had always been solidly behind the Democratic Party, which favored segregation and white political supremacy.  With few blacks voting, the southern white electorate could assure continual Democratic control.

But as the Democratic Party changed, including more of the newly enfranchised black voters, whites began moving out to breathe life into a sleepy GOP that under Lincoln had been the party responsible for freeing the slaves.

This year, in nine of the eleven states that formed the Confederacy, leading to the Civil War, there is no statewide major office holder – governor or senator – who is a Democrat.  Out of the 33 possible slots, only two are filled by Democrats.

This political development is one sign that race still matters.  In fairness, though, it must be noted that one of South Carolina’s GOP senators is an African-American.

The U.S. Supreme Court recently overruled Congress, which had determined that efforts, mostly in the South, to block African American voting still needed federal attention.  A new study suggests the Court’s view is overly optimistic.

With seeking to find out if voters hold racist views by means of polling proving so unworkable, because of people’s reluctance to state openly their feelings on the matter, another way of looking at the presence of racist views had to be found.

A Google search is conducted by a person alone in front of the computer.  It eliminates as an influence the wish to avoid a socially unacceptable action.

A study developed at Harvard University tabulated Google searches for racially inflammatory terms.  Though the analysis was complicated, in simple terms it compared racist “hits” with voting behavior in the last three presidential elections.

The first result of the study was scoring each state and the District of Columbia.  States were ranked in line with the results.

Interestingly, Maine ranked 32^nd, right after California.  Some 59 percent of California’s population is African-American, Asian or Hispanic, so it would be reasonable to expect less racial bias there.  But, in Maine, those groups comprise less than four percent of the population.  (For details, search Google for “Racial Animus and Voting” and this study will be listed.)

The central part of the study focused on whether racial attitudes affected the outcome of the recent presidential elections, assuming that when John Kerry, a white Democrat, ran in 2004, there was no reason for racial bias.  The question was whether when Barack Obama, a black Democrat, ran in 2008 and 2012, racial bias showed up among the voters.

The study found “relative to the most racially tolerant areas in the United States, prejudice cost Obama 4.2 percentage points of the national popular vote in 2008 and 4.0 percentage points in 2012.”

In 2008, Obama won by a margin of 7 percent and, in 2012, by 4 percent.  Without the racial element, his electoral vote might have approached landslide proportions.

He appeared to gain little from his race, because it is unlikely that white voters supported him because he was black.  African-Americans, who represent a small part of the total vote, were already heavily Democratic supporters.

Undoubtedly, Obama’s election in 2008 was read by both black and white voters as indicating an improvement in race relations.  About 64 percent of blacks saw improvement.  

But, according to national polls, by 2011 attitudes were falling back to pre-Obama levels and, this month, only 35 percent of blacks thought race relations are good.  The reaction of whites was similar but the swing was less wide.

Perhaps hopes were too high for how much change Obama could bring.  But the GOP’s unwillingness to cooperate with him on virtually any major issue may have suggested to African Americans that there is a political desire to prevent a black president from ending up with a successful record.

Congress now has four parties. Is compromise possible?

Voters said in November they wanted bipartisan cooperation in Congress next year.  They got their wish early as this year’s Congress move toward its end.

They may have also helped create a Congress next year composed of four political parties not only the deadlocked Republicans and Democrats.  Both of the major parties have split in two.

The GOP divide developed after the 2010 election of candidates backed by the Tea Party movement.  Having made strong commitments in their campaigns to stick to their promised conservative positions, they have refused to accept the compromises necessary to pass bills.

Their power came partly from an informal rule that the GOP would not pass bills unless they had the support of a majority of the majority.  In other words, unless bills could gain the votes of most of the 

Republicans, they would not even be considered.

At first, longer serving Republican House members, worried about primary challenges from tea partiers, went along with their hard line.  But, by the 2014 congressional elections, traditional Republicans, not moderate but willing to compromise, beat Tea Party challengers and regained their confidence.

Republicans won control of both houses of Congress, and many of their leaders believe that winning the presidency in 2016 means showing the party can govern and that governing requires compromise.

Across the aisle, Democratic legislators have been criticized by some of their supporters for being so worried about the apparent popularity of GOP conservatism that they either adopt similar views or do not pursue traditional party positions favoring an active government role in matters ranging from environmental protection to bank regulation.

Some Democrats attribute their party’s losses in this year’s congressional elections to many of its candidates having taken up anti-government positions.

As a result, a split has emerged between so-called progressive Democrats, who see an important role for government, and moderate Democrats who seek compromises with the GOP, recognizing the congressional balance of power will favor the Republicans for at least the next two years.

The role of each of these four “parties” became clear during last week’s votes on adopting a federal budget.  Failure to do so would have forced the government to shut down, which most senators and congressmen, to say nothing of the president, did not want.

The compromise required that Democrats accept GOP add-ons.  One eases controls on big banks, allowing them to undertake risky investments with federal backing, making a federal bailout again possible.  The other allows a ten-fold increase in the size of financial contributions to political parties.

The House voted first, adopting the budget by a narrow 219-206 vote.  Among the Democrats, 57 voted for the bill, to support both compromise and President Obama, who had announced he could accept it.  On the other side, 67 Republicans, who failed to get the bill to block Obama’s immigration policy, opposed the compromise.

Maine representatives, both Democrats, voted against the bill, because of their opposition to the GOP amendments.

The same story unfolded in the Senate in its last days under Democratic control.  The budget passed 56-40.  As in the House, the opposition came from a mix of members of both parties, with the GOP seeking an attack on immigration policy and the Democrats opposing the relaxed bank regulation.

Both Maine senators, Republican Susan Collins and Independent Angus King, supported the budget compromise.  They have campaigned as compromisers.

The development of two split parties in Congress could lead to further compromise deals as the Republicans try to pass bills that the Democrats won’t filibuster and Obama will sign.  In that way, Congress will slide to the right, rather than moving as rapidly as the tea partiers want.

Republicans, in the Senate majority, may be willing to spurn the tea partiers to show they can govern.  Among the Democrats, the compromisers and those who view making deals with the GOP as selling out, will test their relative strength.

The intra-party congressional struggles are likely to be reflected in the presidential candidate selection process.

The GOP, rejecting tea partiers, could lean toward selecting a traditional conservative like Jeb Bush, the former Florida governor, or John Kasich, the current Ohio governor, to show it wants to govern and not merely score debating points. 

While Hillary Clinton seems likely to gain the Democratic nomination, she may face opposition from the progressives, perhaps led by Massachusetts Sen. Elizabeth Warren.  Whether that pulls Clinton to the left or costs her the nomination remains to be seen.

Whatever happens, the four-way split promises an unusual political scene in the next two years.