Republicans face several formidable obstacles as they approach their effort this autumn to reform corporate and individual taxes.
For one thing, partisan Democrats can be counted on to block any Republican plan in order to deny the GOP any achievements and have already made it plain that no reforms based on conservative principles would in any case be acceptable. Many big-government liberals and almost the entire congressional caucus that represents them will vocally oppose any plan that lowers tax rates, traducing them in typical fashion as benefiting only big business and the wealthy.
But in the past, the fiercest and most dangerous opponents of tax reform have included not only those on the Left but also businesses themselves. The complexities of the tax code are largely the result of corporate special-interest lobbying. America's unnaturally high tax rates — our corporate rates are the highest of any developed country — is the fault of big business as well.
It is therefore crucial this time around for companies and trade groups to drop their defense of special loopholes and carveouts and get behind a tax reform that lowers rates and simplifies the code.
Tax reform can boost the economy and reduce government interference in business, but it will work only if Congress axes all special-interest carveouts, inconsistencies, and loopholes. If it softens on this and suggests that some might be saved, we will get an internecine warfare with each business scrambling to make sure its federal favors are the ones that get saved. Real, effective, reform requires that no one's darling be spared. Do not ask for whom the bell tolls; it must toll for everyone.
Tax reform should make the code simpler and more neutral, eliminating loopholes, widening the tax base, and lowering rates. This will reduce businesses' overhead and barriers to entry for new companies, thus increasing competition and quality while lowering prices for consumers. Tax neutrality toward different types of economic activity will reduce distortions, leaving the market, which is to say the people, in charge of allocating resources rather than having the government continue in its usurpation of that role.
Unfortunately, big business tends to approach tax reform as a prisoner's dilemma. Each industry believes that if it doesn't fight to preserve its special handout, it will be the only one excluded. This attitude threatens the entire effort and could prevent the massive economic boom that is waiting to happen as soon as the code's debilitating inefficiencies are excised. The more loopholes that remain, the higher the final rate everyone will have to pay. So in multilateral disarmament, if everyone puts down their gun, everyone can walk away a winner.
Successful businesses should have confidence in their abilities and in their companies' products. They should make money the honorable way, by creating valuable goods and services that consumers or other industries want to buy. Begging for extra pennies and special breaks from Uncle Sam may help each company's bottom line a little in the short run, but nearly every industry that operates in a real free market would benefit from simply having a lower tax rate and a faster-growing economy in which there are more eligible buyers.
Chief executives are being fooled about the importance of their lobbying operations and tax breaks by their own lobbyists and tax lawyers. These entrenched members of the political class will try to persuade businesses that the most important investment they can make is to hire former staffers from the Ways & Means Committee and the Treasury Department. They will argue that it is suicide to let one's own special tax loophole expire, even if tax rates are lowered.
What business executives need to remember is that these Washington insiders, happy as they are to cash the checks, don't have the same interests as their businesses and their shareholders.
Tax reform can work for everyone, and if businesses get behind it then everyone will win. Well, everyone except lobbyists.