Modifying Public Behavior: The Real Bipartisan Goal of Tax Reform

During every election cycle, Americans are treated to a cacophony of supposedly differing ideologies on tax policy. The two dominating party-powers put on an impressive show, each claiming to want reform to an untenably complex tax system and to pass the rewards on to the public in different ways.

There seems to be no voice in the chorus defending the current system. As it stands, the U.S. tax code is more than 4 million words long, making it virtually incoherent to the general public, as well as burdensome to the IRS, whose agents are consistently stretched to review and enforce the code’s innumerable provisions each year. (For perspective, the King James Bible has fewer than 800,000 words.)

On the surface, it would seem that the reason tax reform is always just beyond the horizon is that, despite harmony in demands for reform, Republicans and Democrats actually mean very different things in their use of the phrase.

The discord is apparent in President Obama’s 2015 State of the Union address:

“As Americans, we don’t mind paying our fair share of taxes, as long as everybody else does, too. But for far too long, lobbyists have rigged the tax code with loopholes that let some corporations pay nothing while others pay full freight. They’ve riddled it with giveaways the super rich don’t need, denying a break to middle class families who do.” President Barack Obama, State of the Union address

The complexity of the system means that, without actually raising the maximum rate for anyone, the president can still effectively raise taxes simply by closing loopholes. Without any opportunities to save, the amount companies and the wealthy pay will rise to more closely match what their tax bracket has been all along.

This is how Democrats could increase revenues without cutting spending or actually raising tax rates.

Republicans agree that reform is necessary — and, like the Democrats, have put these troublesome ‘loopholes’ in their crosshairs. Subtly coded into the Republican retort to the State of the Union was the party’s variation on this agenda:

“Let’s simplify America’s outdated and loophole-ridden tax code. Republicans think tax filing should be easier for you, not just the well-connected. So let’s iron out loopholes to lower rates — and create jobs, not pay for more government spending.” – U.S. Sen. Joni Ernst (R-Iowa), official Republican response to the State of the Union address

Recognizing that loopholes lower the effective rate paid by those who manage to navigate the tax code minutia, Republicans agree that simplicity is best, but demand lower rates in unison with reform. Like the Democrats, they want the effective pay rate to match the maximum rate, but only if the maximum comes down.

This is how Republicans can cut taxes without adjusting spending or effectively losing revenue.

Given all this ceremonial bluster about which way to achieve the same, ostensibly shared goal of reform, it is depressingly easy to lose sight of what taxes are actually supposed to do — and how neither leading party wants to give up misusing them.

In constitutional terms, federal taxes exist to pay for the operations of the government itself, as well as some basic public services. Tax policy would be complicated enough if it were limited to debate over what “basic public services” should actually entail.

Constitutional interpretation has taken a backseat, however, to ideas of how tax policy — and the massive web of incentives, penalties, and relief programs built into the code — is used to control public behavior.

The language of both speeches on Tuesday, January 20, implies that some external force — “lobbyists” or the “well-connected” — pesters lawmakers and corrupts their intentions. This is misleading because the ambiguous descriptor “loopholes” is only partly the problem. Lawmakers should take responsibility for riddling the law with “incentives” and “penalties” if they are interested in accurately apportioning blame.

On the Democrats’ side, the most public example of using taxes as a behavior modifier is the Affordable Care Act. Its constitutionality hinged on promised ‘fees’ for those who fail to purchase insurance not being ‘fees’ at all, but actually a tax. Call it a tax, the Supreme Court explained, and you can use it however you want.

Reactions from the right were indignant and bemoaned government overreach, not because this is an abuse of the tax power, of course, but because they disagreed with the legislation itself: forcing people to buy something is wrong (what is used as the stick is irrelevant).

Lawmakers should take responsibility for riddling the law with 'incentives' and 'penalties' if they are interested in accurately apportioning blame.
Edgar Wilson, IVN contributor
Once Republicans achieved their latest majority in Congress, one of their first collective ambitions was to rewrite the accounting rules
of the Congressional Budget Office (CBO). Dynamic Scoring, their preferred method, assumes that taxation can and will drive public behavior, and that predictions of what that behavior will be should be used when evaluating fiscal policy ideas.

This rule change frees them up to, in theory, boost America’s GDP by giving tax breaks to targeted groups (mostly big businesses). Dangling the carrot of a lower rate is supposed to make the economy as a whole grow. And so on.

Real simplicity would deliver a system of taxation based on simple accounting — and fairness. The constant fluctuations in fiscal policy (not to mention the bulk of the current code) come from the government’s attempt to push and pull the public in various directions. The question is not whether the government’s goals are in the public interest; it is whether hijacking taxes with such extraneous provisions is the most effective way to pursue such goals.

The constant bipartisan claims that simplicity is desirable are misleading, because ultimately they reflect extremely partisan interpretations of ‘simplicity’ that would preserve the penalties and incentives preferred by either party.

If the supposedly shared goal of reform were truly shared, the conversation would focus not on the special interests outside government that resist change, but on government’s own interests in controlling behavior. Economics is complex enough without the added weight of social-engineering.

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