Question

Jason Furman served as the chairman of the White House Council of Economic Advisers under President Obama. In an opinion column in the Wall Street Journal discussing President Trump's tax reform proposal, Furman noted the need "for seriously revamping America's inefficient business-tax system to unlock stronger economic growth." But he also observed that tax reform is even more difficult than reforming the health care system "since it touches a larger fraction of the economy and threatens more powerful vested interests." a. Briefly explain what Furman means by "powerful vested interests." b. If tax reform leads to stronger economic growth, shouldn't a majority of Congress support it even if vested interests oppose the reform? Why then has tax reform legislation been difficult for Congress to pass?

Short answer

Furman's reference to 'powerful vested interests' typically points to groups or entities benefiting from the current system and opposing changes enacted by tax reform. Although tax reform could theoretically stimulate economic growth, the practicality of passing it is made difficult by opposition from these vested interests. Furthermore, the complexities introduced by such reforms and the political sensitivity surrounding it also contribute to the challenge.

Step-by-step solution

Define 'Powerful Vested Interests'

'Powerful vested interests' typically refer to groups or individuals who have a strong interest in maintaining the status quo because they benefit from the existing system. They have much at stake in policy changes. These interests can be corporations, industries, or other influential entities that could be negatively impacted by tax reform.

Explain the Potential Benefits of Tax Reform

In theory, tax reform can lead to stronger economic growth by making the tax code more efficient, fostering an environment more conducive to business, and potentially increasing government revenue.

Discuss Practical Barriers

Even though tax reform has potential benefits, potent opposition from 'powerful vested interests' can make the reform difficult to be passed. These interest groups may display their power by lobbying efforts or campaign contributions. Furthermore, tax reforms may also introduce complexities that could be politically sensitive and divisive. These make tax reform a complicated issue despite potential economic benefits.

Result of Barriers on Implementation

Under the pressure and influence of 'powerful vested interests', lawmakers may find it difficult to back tax reform legislation, despite its potential benefits, as they risk losing support from these groups. This results in a challenge to pass such reform in Congress.

Key concepts

Economic Growth

Economic growth refers to the increase in the output of goods and services in an economy over time. It is commonly measured by the rise in real Gross Domestic Product (GDP). Sustainable economic growth can lead to improved living standards, higher employment rates, and increased income levels. When discussing tax reform, proponents argue that an efficient tax system could fuel economic growth by encouraging investment and business expansion. However, it is important to understand that the relationship between tax reform and economic growth isn't straightforward. While lower tax rates might encourage spending and investment, if not managed wisely, they could also lead to government deficits and reduced public services. Therefore, finding a balance in tax codes that promotes growth while maintaining fiscal responsibility is crucial.

Vested Interests

Vested interests typically encompass groups or entities that have substantial investments or stakes in maintaining the current economic or political systems. These groups include large corporations, influential industries, and unions that might benefit from tax advantages or government policies. Such vested interests often resist changes that could negatively impact their profits or influence.

• They may oppose reforms that threaten their established benefits.
• Vested interests often have significant financial resources, allowing them to influence political processes.

Even if tax reform may seem beneficial on a broader level, these powerful groups may lobby against changes to protect their interests. This can create significant barriers for policymakers who support reform.

Legislative Process

The legislative process refers to the steps through which a proposal becomes law. In the United States, this process involves the introduction of a bill, committee reviews, debates, voting by both houses of Congress, and the president's approval. This process is designed to ensure thorough scrutiny and debate of proposed laws.
While this process is crucial for democratic governance, it can also lead to delays and complications, especially in the case of controversial reforms like tax legislation. Tax reform affects a large part of the economy, making it subject to intense scrutiny and debate. Moreover, when vested interests oppose such reforms, they can utilize the complexity of the legislative process to stall or block changes by:

• Encouraging amendments that dilute the reform's objectives.
• Lobbying committee members to withhold support.

As a result, despite potential broad benefits, pushing tax reform through the legislative process remains a significant challenge.

Business-Tax System

The business-tax system refers to the framework of laws and regulations governing the taxation of businesses. This includes corporate income taxes, payroll taxes, and other levies that businesses must pay to local, state, and federal governments. An efficient business-tax system is critical for ensuring that companies contribute fairly to government revenues and support public services.
Efforts to reform the business-tax system often aim to:

• Simplify tax codes to reduce compliance costs for businesses.
• Lower tax rates to stimulate investment and competitiveness.
• Close loopholes that some corporations exploit to avoid taxes.

However, creating a balanced system that ensures fair taxation while promoting economic growth is challenging. Reforms must consider the diverse nature of the business landscape and avoid placing undue burden on small and emerging businesses.

Lobbying

Lobbying is the act of attempting to influence decisions made by government officials, typically legislators or members of regulatory agencies. Lobbying is conducted by individuals, groups, or organizations on various issues, including tax reforms. While lobbying can ensure stakeholders have a voice in policymaking, it can also lead to disproportionate influence by well-funded vested interests.

• Lobbyists often work on behalf of corporations or industry groups.
• They use their resources to sway legislators' opinions and actions.

In the context of tax reform, lobbying efforts can often result in maintaining the status quo, rather than enabling beneficial changes. It becomes particularly challenging for lawmakers to push through reform initiatives when they face strong opposition backed by extensive lobbying campaigns. Understanding and regulating lobbying activities is crucial to ensuring a democratic process that serves the broad public interest.