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The Pointless Pursuit of “Tax Certainty”

Everybody’s having a good time making fun of Jim VandeHei and Mike Allen’s recipe in Politico for “Creating A Boom Economy.” The piece accepts as gospel truth the collective (and not-terribly-well-informed) wisdom of corporate America and the center-right in Congress about what’s needed to revive the economy. Never mind, as Paul Krugman astutely reminds us, that most if not all these geniuses previously believed that financial regulation was increasingly unnecessary because the market had learned how to manage risk; that there was no housing bubble; that inflation was just around the corner; and that austerity was the path to economic growth. (Most probably still believe these last two.) TNR’s Molly Redden yesterday checked in with some economists, think-tankers, and labor leaders and found—guess what?—they had rather different ideas about what the economy needs. (Short answer: jobs.)

Of all the talking points put forth in VandeHei and Allen’s piece, perhaps the most fatuous is the urgent need for “tax certainty”:

Bank of America CEO Brian Moynihan said long-term commitments to measures such as tax reform … would provide a “certainty premium” that would help bring corporate cash off the sidelines. “If we can just allow people to keep their confidence up by getting some of these issues off the table,” he said, “you would see the economy grow and momentum continue to build, and unemployment continue to ease down, and housing starts [go] up and housing prices [go] up. All that will continue to build on itself.”

VandeHei and Allen like Moynihan’s point so much that they later repeat it: “Tax reform would … help create the 'certainty premium' Moynihan spoke of.”

(Why Moynihan? Esquire’s Charles Pierce reminds us that he isn't much of an expert even about what goes on inside his own bank, judging from his deposition in a 2010 Countrywide lawsuit, which is peppered with "I don't recall"s. But I digress.)

To review: Corporations need certainty, and the government should provide that certainty through tax policy. But if certainty were truly our priority, wouldn’t the preferred action be … not to reform taxes? What could be more predictable and certain than perpetuation of the status quo? Tax reform introduces all sorts of uncertainties. How far will the rates drop? Which loopholes will be eliminated? And so on.

In fact, when corporate types say they need “tax certainty” what they really mean is they want “lower taxes.” The “uncertainty” invariably concerns whether taxes will go up, not whether they’ll go down. Here, for instance, is Tim Ryan, chief executive of the Securities Industry and Financial Markets Association, in 2010, griping about "tax uncertainty" before the Bush tax cuts received a two-year extension:

One of the most frequent questions these advisers hear from their clients is what will happen to capital gains and dividend tax rates, and how that will affect their investments.
Unless Congress acts, the taxes on capital gains and dividends will increase substantially in 2011. The capital gains tax rates would increase by as much as 33 percent, from a current maximum rate of 15 percent to 20 percent. The tax hike for dividends is even more drastic, with tax rates for many investors increasing by nearly 164 percent. These increases do not include the additional 3.8 percent tax on investment income that was already passed this year as part of the health care reform bill.

The law couldn’t be more certain about what will happen. When the capital gains cut expires, capital gains taxes will go up. When the dividends tax cut expires, dividends taxes will go up. We even know how much they’ll go up; it’s all written into law. We've known what will happen for a decade. Ryan isn’t complaining that Congress might cancel or alter that planned tax increase. He’s complaining that Congress might not cancel or alter it. Nobody’s talking about cancelling or altering the new 3.8 percent Medicare tax on investment income that gives Ryan heartburn, so why is he even bringing it up? It’s certain to happen!

There is a somewhat more sophisticated version of the “tax certainty” critique that does kinda-sorta link certainty to tax reform, although really it has less to do with certainty than with “sunsetting,” the legislative term for writing into law the stipulation that this or that provision will at some time in the future self-destruct like the messages Peter Graves used to receive on Mission: Impossible. In general, as Congress has gotten more partisan, its actions have gotten more temporary. Unbridgeable differences are patched over with short-term solutions that leave eventual policy questions unresolved ("kick the can down the road"). First, “continuing resolutions” displaced straight-up appropriations. Later, sunsetted tax provisions started displacing permanent ones. A decade and a half ago there were fewer than a dozen sunsetted provisions in the tax code. Today there are about 140. What has that got to do with tax reform? Well, the fewer provisions you had (i.e., “deductions and exemptions”), the fewer moving parts there would be to tinker with (i.e., “sunset”). Less sunsetting equals less uncertainty.

Except it doesn't. As already noted, before the tax code got reformed lots of decisions would have to get made about which loopholes to eliminate, a process that would create a whole lot of uncertainty. And even after the tax code were reformed, absolutely nothing would prevent Congress from reintroducing certain loopholes or eliminating additional ones, not to mention meddling with the rates (which, under tax reform as currently envisioned, would be lowered in exchange for eliminating loopholes—a scheme that, by the way, would raise significant additional revenue only if you were far more brutal about eliminating loopholes than seems politically possible). The 1986 tax reform is the model everybody invokes, but what’s forgotten is that in relatively short time many of the loopholes (most notably, for capital gains) crept back in, and that, four years after the bill was passed, marginal tax rates were increased, then increased again three years after that. So much for certainty.

The quest for tax certainty, like the quest for certainty in all aspects of life, is a fool's errand. Life is uncertain. You could die tomorrow, or lose your job, or find out your spouse is having an affair. Tax policy is uncertain too. It must constantly be adjusted to fit new economic realities. That's why Congress has two permanent committees dedicated to reviewing and rewriting the tax code in accordance with the (sometimes crackpot) priorities of their members. Welcome to democratic governance. Congress may pass tax reform, or it may (more likely, I think) not pass tax reform. The long-term result will be the same uncertainty that corporate chiefs bitch about today. Then, as now, though, all they'll really care about is forking over fewer samolians to Uncle Sam.