Thursday, March 30, 2017

The case for true tax reform

Supposedly, the next real issue the GOP will take up is tax reform.  Tax reform-- real tax reform-- won't pass.  But there is a case for it.  Here it is.

First, let's define our terms.  Tax reform, separate from tax cutting, means simplifying the tax code, in a revenue-neutral way.  The tax code is littered with loopholes.  Get rid of the loopholes, and you can lower the nominal rates for everyone, keeping the same level of revenue.  Some people's rates go up, some go down, but everything gets more simple.

The tax code is insanely complicated.  That has costs.  We reward and punish people through the tax code.  Sometimes we do so intentionally to reward "good behavior," like giving people tax benefits for charitable contributions, although some of the things that get rewarded as charitable contributions are not exactly feeding homeless children.  Regardless, some of the complexity is there to incentivize the behavior we want to incentivize.  A lot of the complexity, though, is either outdated, or just there to reward one group over another, not to benefit society more broadly, but because somebody in Congress saw an advantage in putting it there (i.e., the company that benefited most was in his district).  When we incentivize charitable contributions, we are distorting the market in a "good" way.  When we give an advantage to Company A over Company B because the tax code has a giveaway that happens to benefit Company A, we are distorting the market in a "bad" way.  Simplifying the tax code can get rid of the bad distortions.

Relatedly, companies have incentives to spend money looking for ways to exploit the tax code rather than, ya' know, R&D etc.  That both draws their resources and drains revenue from the Treasury when they succeed.

In fact, they have to spend a significant chunk of their operating costs on tax compliance given the complexity of the tax code.  That's wasted money that doesn't have to go to waste under a simplified tax code.  Who pays for that?  Ultimately, consumers.

That's the quick version, but there is a lot to be said for a simplified tax code.  Of course, we haven't done tax reform since 1986.  Why not?  Tradeoffs.  We'll get to that, but it won't happen.

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