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October 12, 2017

Is Tax Reform in Trouble?

 

Several recent news stories have suggested that tax reform may be in trouble.

Well, duh. OF COURSE tax reform is in trouble—tax reform is ALWAYS in trouble. There is no heavier lift in Congress than tax reform, because it brings every vested interest off the sidelines and into a battle royal.

These stories focus on ending the deductibility of state and local taxes, which Republicans from high-tax “blue states” almost always oppose. And of course there is the deficit angle, since Republicans in Congress seem to have no stomach for cutting spending or actually reducing the size of government. Any tax cut is thus likely to grow the deficit, at least at first, before increased economic growth kicks in.

Some businesses may jump off the bandwagon if eliminating the deduction for business interest becomes a factor. Many industries will jump if the business tax rate, now targeted at 20 percent, begins to creep upward. And all those tax credits and deductions they’re willing to trade away in exchange for a low rate will come back into play.

But none of these considerations will kill tax reform. If tax reform fails, it will be because of the same thing that has killed many other important legislative projects lately: Letting the perfect become the enemy of the good.

Far too many senators and members of the House, and far too many tax reform advocates, have gotten in the habit of opposing anything that isn’t exactly what they think it should be. Within the Republican caucus, this happens at both extremes, which is how you get Obamacare repeal killed by both those who think it went too far and by those who think it didn’t go far enough.

Compromise on principles is wrong, but compromise on details is necessary, if any good is to be obtained. As the Pareto principle reminds us, it takes 20 percent of the effort to get 80 percent of the result, but achieving the final 20 percent takes 80 percent of the effort. Because of this diminishing return to effort, achieving the perfect is practically impossible.

In business, in project management, and in life, everyone practices the Pareto principle, but in Congress a small, stubborn group of perfectionists can quash critical efforts like tax reform or Obamacare repeal. That has to stop.

As Ronald Reagan said, “The person who agrees with you 80 percent of the time is a friend and an ally—not a 20 percent traitor.”


 

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