Robin Hood: Man in Speedo

President Obama has tried to position himself as a post-partisan Robin Hood, protecting the interests of the working class against rapaciously greedy working professional married couples with $250,000 incomes (bling-bling). He better stock up on Speedos, because his tax policies will leave us treading water for the next decade.

As I discussed yesterday, a dart-throwing monkey could put together a list of Obama's talking points for any given speech on tax policy. But, all fun aside, the posture of the U.S. political left on tax policy contains the seeds of its own undoing.

So what's the major flaw with the direction of Obama's tax policy?

The Obama administration and its cheerleaders generally believe that the solution to any budgetary issue is to "raise taxes on the wealthy" and to "close tax loopholes for greedy corporations." They make exceptions for favored industries and favored campaign donors, but they stay pretty consistent on message.

On the surface, this seems like good politics. If you convince 98% of the voting public that 2% of the voting public is not paying its "fair share," you can generate healthy majorities in favor of higher taxes on the 2%. At a minimum, you can use the Robin Hood card to get yourself elected or re-elected!

However, the political left harbors a desire to expand government and socialize the funding mechanism for various services (health care, green energy, affordable housing, etc.). The left's appetite for new programs requires new tax revenues. Mind you, we're not talking 'new tax revenues to reduce the trillion dollar budget deficit.' We're talking 'new tax revenues to pay for the President's new stimulus plan,' or 'new tax revenues to pay for Obamacare.'

Let me pause and note that politicians on the right have been complicit in the federal spending orgy that created our long-term budget crisis. However, the emergence of the Tea Party has created significant pressure on the right to end its complicity.

So the left needs new revenues, and it boldly declares class warfare on working professionals and their distant cousins in Martha's Vineyard and Sun Valley, the "millionaires and billionaires." In its thirst for revenues, it amends the Internal Revenue Code to create a series of "pay fors."

What do I mean by "pay for"? A "pay for" is a change to the Code that is projected to raise enough revenue to "pay for" a liberal spending objective. In recent years, Congress has enacted numerous "pay fors" without carefully weighing the consequences. One such folly was expanded 1099 reporting for small business (subsequently repealed). Another was the codification of the economic substance doctrine (which has left everyone, from the IRS to the tax practitioner community, scratching their heads).

Here's the thing about "pay fors." Tax policy driven by "pay fors" is no tax policy at all. "Pay fors" are a series of effectively random changes to the Code that are driven by political momentum to pay for a desired spending program. It is impossible to verify that the projected revenues from a given legislative change ever materialize.

And here's the other thing about "pay fors." When the political left closes a "loophole" to fund a new spending program, the revenues from that "loophole" are not available for deficit reduction. For example, President Obama would "pay for" the cost of his proposed stimulus act (ahem, "jobs plan") by raising taxes on the various bad apples described above (working professional married couples, millionaires and billionaires, oil and gas companies, private equity fund managers). However, if that proposal is enacted, we are still facing trillion dollar deficits as far as the eye can see. If the revenues of a new spending program are financed with a "pay for" that changes the existing tax rules, we're effectively trading water.

In this sense, the tax policy agenda of the political left contains the seeds of its own undoing. Sure, we can "pay for" new spending programs (the new stimulus act, Obamacare, whatever) by increasing taxes on the "wealthy" and "big corporations." But we're left treading water from a long-term budget perspective. Meanwhile, the Code gets more complex, and many businesses and individuals spend more time and money on non-productive tax planning and tax compliance activities.

The only way to finance the spending objectives of the political left and to tackle our long-term fiscal challenges is to increase taxes on everybody: rich, upper-middle class, middle class, lower-middle class, and poor. Maybe the left will convince voters and taxpayers that we should move in that direction. I wouldn't put money on that bet.

Get a Real Job

The chair of the American Bar Association Section of Taxation wants tax advisors to get a real job. (Thanks to Paul Caron for archiving the PDF copy of the Tax Notes article.)

On June 9, 2011, Egerton mused that:

The goal that Congress ought to have is to put as many of us out of business as possible. Now I say that with full confidence that it's not going to happen," said Charles H. Egerton. Although Congress may stop short of completely restructuring the code, he said, "we'll have to reinvent ourselves. That's a price we need to be willing to pay."

Egerton's comments in an obscure industry publication for tax nerds won't receive much attention. That's a shame. I believe that Egerton is onto something. As he says, our "[Income Tax Code] is just an inscrutable mess. It is complex. It is largely inadministrable." And he's not even considering state tax rules and regulations!

Take a few moments to consider the bigger picture. In America, our quality of life is driven by our political freedom and economic prosperity. Our economic prosperity is driven by the creativity and innovation of our entrepreneurs, technologists and business leaders over the past two centuries. Sure, we had a good "business climate" to promote economic growth (stable rule of law, property rights, market-based capitalism, etc.). But within that temperate climate, Americans have built a remarkable economic engine. We have been really good at developing, financing, producing and marketing goods and services into domestic and international markets. Or more simply: making and selling things.

Where do tax professionals fit into that picture? What value do tax professionals add to the "commercial matrix" of development, finance, production and marketing? The answer may bruise the egos of practitioners and academics from both sides of the political spectrum. The answer is: absolutely none. With respect for your virtues, brothers and sisters, we are simply leeching off a "complex, inscrutable and inadministrable" regulatory regime.

So we have developed an army of tax professionals -- intelligent, earnest, focused men and women -- who contribute virtually nothing to the long-run evolution of the "real economy." As a nation, we allocate nearly half a trillion dollars to tax planning and tax compliance each year -- half a trillion dollars that could be used in more productive activities. Sure, some of us will argue that 'tax professionals help clients comply with the tax rules as they are, and that keeps more cash in the private economy where it will be invested more efficiently than cash in the government coffers.' However, that argument rings hollow. We aren't making things better by leeching off the commercial matrix. We shouldn't (and we don't) need an army of tax professionals to tend to the clients. We need a better, simpler tax regime. And we need more intelligent, earnest, focused men and women involved in the "real economy."

I believe that the tax community should take Egerton's challenge to heart, and begin working on serious proposals to "downsize" our ranks by drastically simplifying the U.S. tax regime. Many tax professionals will resist the challenge, because they earn a comfortable living. And let's face it: displacement from a specialty niche in tax would be socially jarring and economically painful for many. But no pain, no gain. We are currently part of the problem. One of our cultural legacies is our ability to troubleshoot problems. Perhaps the U.S. tax community can rise to the challenge.