February 13, 2004
Baby Steps Towards Tax Reform
Trust an economist to devise the perfect tax policy, and you're liable to come up with something that looks a lot different than what we have today. Like the "single tax" of nineteenth century economist Henry George, who wrote that only land should be taxed. Or even the "head tax" idea of the same era, which gave every man, woman and child the same tax bill, regardless of economic circumstances.
These peculiar taxes find favor with economists because they don't influence people's behavior. Whether you work or loaf, save or spend, or even move your company address to Bermuda , you'll have the same tax bill. To our simple, and perhaps cheerless, minds, the best tax is the one that you simply cannot avoid.
What we have in the United States today is another animal entirely. We have a tax system that profoundly affects our behavior. In some instances, like the "sin" taxes on tobacco and alcohol, we proudly proclaim this as our avowed goal. Other behavior changes, like the explosion in employer-provided health insurance after such programs became tax deductible during World War II, seem to occur accidentally. And some reactions to our tax system, especially the use of tax loopholes and other avoidance strategies, make many of us angry.
Anger and taxes have historically gone hand-in-hand, of course. And in battles over tax policy, political considerations will have always won out over the trifling objections of economists. How else could we have gotten to a point where, for example, the state ofFlorida 's description of what is, and what is not, subject to the state's sales tax runs on for dozens of pages?
So in this rough and tumble "real world" of tax policy, where lobbyists and interest groups add hundreds of pages to the tax code as they do battle, what's a self-respecting economist supposed to do? We clearly don't have the clout to re-write the tax laws from the bottom up, and we probably never will. But there's at least two ways we can still have an impact.
One is simply to stop the really bad ideas in tax policy from becoming law. The now defunct State Board of Tax Commissioners inIndiana had one of those a couple of years ago. If their proposed schedules and categories for depreciation of business personal property had gone into effect, it would have cost Indiana businesses more money to make capital investment here.
For a state struggling to capture more investment, this would have been a big mistake. Fortunately, our leadership came around to recognize this and the problem was averted.
Another thing we can do is to help our governments get a better handle on what's going on with the tax revenues that feed their coffers. With so many states, like Indiana , strapped for cash, and with the federal budget deficit ballooning, revenue forecasts are under intense scrutiny these days. Unfortunately, what should be a purely technical, scientific, process is still constrained by politics.
In case you haven't noticed, tax receipts and income growth don't exactly dance to the same beat these days. With so many of us participating in the stock market, and with the complex, ever-changing treatment of capital gains and losses in the Federal tax code, it's become much messier. Recent research suggests that the number of sophisticated taxpayers, who engage in activities that minimize their tax exposure, has increased.
Better forecasts are in the interests of everyone, yet the consequences of adjusting current forecasts up or down are political. But that's no reason to put off this, or any of the other baby steps we can make to get started on tax reform.
About the Author
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