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There was a brief flurry of excitement among economic
conservatives when reports came out suggesting that House Speaker Dennis Hastert
(R-Ill.) had endorsed comprehensive tax reform in his book.
Word had it that the speaker was even willing to abolish the income tax
and IRS in favor of a national retail sales tax.
Then President Bush, in response to a question at a Florida campaign
event, called the national sales tax “the kind of interesting idea that we
ought to explore seriously.”
Exciting talk, perhaps, but nothing much is likely to come
of it. While all the major tax
reform options have considerable advantages over the existing system in terms of
maximizing liberty and prosperity, they all come with political pitfalls as
well. Any flat tax likely to pass
would contain generous personal exemptions that would drop large numbers of
families from the tax rolls, resulting in more Americans who benefit from big
government without shouldering its burdens.
A national sales tax would only be beneficial if the 16th
Amendment authorizing a federal income tax was repealed and future income taxes
banned. A value-added tax is a
hidden tax that would be easy to raise, which is why many key members of the
tax-reform constituency adamantly oppose the idea. And while it is understandable that the Republicans are
seeking to motivate voters who believe in smaller government to show up at the
polls, these are also the kind of ambitious initiatives that don’t usually go
far in sleepy second presidential terms. Ronald
Reagan won sweeping tax reform during his second term, but he was able to rely
on a certain level of bipartisan support. In
the present political climate, the far smaller Bush tax cuts of 2001 and 2003
were overwhelmingly opposed by the Democrats as giveaways to the rich.
Imagine their response to any tax plan that could plausibly be portrayed
as requiring Bill Gates and a struggling single mother to pay the same tax rate
and you immediately see why revamping the tax code won’t necessarily sell as
well with the public at large as it does with free-market think tanks. Just because the politics of tax reform are more
complicated than some of its eager boosters are willing to concede, however,
does not mean that reform is not a worthy goal.
How can we make progress toward a system that is less biased against
savings and investment, less complex and inefficient, more compatible with civil
liberties and the objectives of limited government, and most of all requires
Americans to pay less taxes? Many incremental
approaches have been discussed that might do some good; strategically, they
rely on treating investors as a political constituency. The prospects for anything much bolder are limited by the
GOP’s focus on taxes to the exclusion of spending. During the 1980s, Republicans learned that cutting taxes wins
far more votes than cutting spending. Their
response to this discovery was to adopt a myopic focus on the taxation side of
the fiscal-policy equation and either ignore spending or pursue cuts more
covertly. The fatal flaw in this tactic is that taxes are ultimately
driven by the level of government spending.
As marginal tax rates fell further below the prohibitive ranges on the
much-maligned Laffer curve, it became increasingly difficult to proceed with
further tax cuts without deficits and government borrowing.
The immediate political problem this presents has become obvious: the
resultant red ink has harmed conservative Republicans’ reputations among the
voters for responsible fiscal stewardship. The longer-term problem is that is nearly impossible to
move away from our current anti-investment, anti-growth tax code, and indeed
prevent it from growing more economically destructive, because the government it
funds continues to grow. To put it
simply, a fairly onerous tax system is required to pay for a government as big
as ours. Sure, there could be improvements in efficiency and some
aspects of the present tax code are self-defeating even when it comes to the
basic goal of yielding revenue. But
it takes more than a Hong Kong-like tax system to finance a King Kong-sized
government. An at least superficially progressive tax code riddled with
loopholes and multiple tax rates staves off tax revolts and spreads the pain
among potential political actors. But
to prop up our current leviathan, we are likely to need a higher sales or
flat-tax rate than great swaths of voting taxpayers are going to be willing to
pay. Promises that fairly low rates
will suffice have been questioned even by sympathetic observers while they are
certain to be assailed as “rosy scenario” projections by determined
defenders of high taxes. Our nation’s largest spending programs are often treated
as immutable, but the current size and scope of the federal government is not
etched in stone. It is the product
of numerous political choices and we can opt for a more enterprise-friendly,
pro-growth, low-tax policy if we make different choices on the spending side.
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