Want Lasting Tax Reform? Shrink Government
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Amendment authorizing a federal income tax was repealed and future income taxes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.