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Sisyphus Had It Easy Reflections on Tax and Budget Reform

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Sisyphus Had It Easy Reflections on Tax and Budget Reform Sisyphus Had it Easy Reflections on Tax and Budget Reform By Eugene Steuerle In the heady days after his re-election, Presi- dent Bush promised to replace the current tax system with something better. Politicians often delude themselves that reform can be sum- moned by proclamation. But, a wholesale trans- formation of the income tax system isn’t about Ito happen quickly or painlessly. In fact, only painstaking bottom-up planning could do the trick. The three major tax reforms since World 18 The Milken Institute Review First Quarter 2005 19 War II – in 1954, 1969 and 1986 – all required highly cherished tax breaks for higher educa- an enormous amount of staff work and tion, not to mention preferential tax rates on Congressional coalition building. And of the income received as capital gains. three, only the 1986 changes amounted to a Meanwhile, the average citizen faces an true makeover. array of tax-based retirement-plan provisions Since the tax system now affects nearly that makes the fabled Clinton health reform every facet of American life, hardly anyone plan look simpler than a Starbucks menu. likely to pay more goes to the shearing with- Check that: I meant Starbucks before the lat- out a bleat. Tax breaks provide indirect subsi- est tax legislation, which grants a tax break to dies to homeowners that are greater than the some integrated coffee chains on “the value of entire budget of the Department of Housing roasted coffee beans used to brew the coffee,” and Urban Development. The Earned Income provided the roasting is done off premises. Tax Credit program is now larger than any Real tax reform can’t begin until policy- other welfare program, including food stamps. makers (or, at least, their staffs) understand The break for employer-provided health in- the implications of change for everyone from surance, currently costing $150 billion per caffeine empires like Starbucks to farmers year, is the largest federal health subsidy for who make a living selling their corn to make the non-elderly and is growing faster than al- ethanol additives for gasoline. Saying that one most all other domestic programs. And then, is for tax reform is like saying that one is for of course, there are more than half a dozen eliminating wasteful government expendi- tures; it’s just not very informative. Throwing out the tax code may sound fi ne EUGENE STEUERLE, co-director of the Urban-Brookings Tax Policy Center, served as deputy assistant secretary for in a sound bite. But policymakers still have to tax analysis of the Treasury from 1987 to 1989 and as presi- decide what to do with federal programs for dent of the National Tax Association. Parts of this article are taken from his book, Contemporary United States Tax housing, work, education, retirement, char- Policy (Urban Institute Press, 2004). ity, energy, environment, transportation and anderson mark 20 The Milken Institute Review The president and Congress have inherited health care and retirement policies that long ago put government spending on an unsustainable track. all the other policies now largely implement- health care and retirement policies that long ed through the tax code. By the same token, ago put government spending on an unsus- someone still has to decide whether the IRS tainable track. The problem is not just that is going to need employees to rate movies spending on the elderly accelerates in 2008, for arousal potential, because Congress has when the boomers start turning 62; it’s also extended the new manufacturing tax break that the growth rate of national income and to that vital piece of the industrial heartland government revenues can be expected to known as Hollywood – excluding, “certain decline along with the drop in the fraction of sexually explicit productions.” adults working and paying taxes. When the Sometimes, reformers can’t ignore the boomers are all in their dotage, close to one implications of tax change, even if they are adult in three will be collecting Social Secu- determined to try. Converting the income rity. The cost of Medicare, another wide open tax to a consumption tax, for example, would entitlement for seniors, will grow even fast- eliminate special incentives for retirement er than Social Security outlays; the new pre- saving at a time when such saving is one hope scription drug program will only add to the of making it through the baby boomers’ gold- budget problem. en years without bankrupting the Treasury. Exacerbating the fi scal crunch, the last However diffi cult and even quixotic, the few Congresses went on a giveaway spree like quest for tax reform must be undertaken once none other in the nation’s history. New tax in a while if for no other reason than to keep cuts and entitlements, a defense buildup and the arteries of the tax system from becoming more spending for farms, highways, workers, hopelessly clogged with preferences. Trouble doctors, manufacturers and everyone’s favor- is, to keep budget defi cits within bounds, the ite uncle breezed through Capitol Hill. This public would have to swallow the changes as- rapid, unparalleled growth in commitments sociated with base-broadening and simplifi - from a “conservative” Congress has been the cation with an even bitterer swig of defi cit re- major factor wrenching the federal budget duction. Meanwhile, President Bush is at- from short-term surplus to yawning defi cit – tempting to make his previous tax cuts per- a turnaround of 7 percent of GDP. manent, which implies that any defi cit-cut- In the current post-election budget milieu, ting measures he proposes would suck more the powerful push for tax reform that does cash from fewer pockets. The same can be not affect total revenues can mean much more said of changes required if part of the Social than simplifying and rationalizing some of Security tax is redirected into individual ac- the provisions catalogued above. Some want counts, leaving Washington to cover the sys- a revenue-neutral reform to further lower tax tem’s existing liabilities from other sources. rates (particularly on investment income) as The backdrop for reform is even darker. a matter of economic policy, and competing The president and Congress have inherited consumption tax proposals abound. Every First Quarter 2005 21 A common place of conflict is the nexus between progressivity and individual equity, since taking from A, a person with means, to give to B, a person with needs, typically also denies A some of the rewards of his or her own work. special break in the tax code has a private that those with equal ability to pay should lobby to defend it, not to mention a cheering pay equal taxes. section within the government bureaucracy. • Progressivity, or “vertical equity,” suggests that those with greater needs should receive retreat from tax principles more from government and that those with Tax breaks – “tax expenditures” in econom- greater ability should pay more to govern- ic jargon – account for one-fourth to one- ment. third of government benefi ts and subsidies. • “Individual equity” holds that individuals The tax code is riddled with preferences that are entitled to the product of their own labor undermine the goal of equal treatment under and to a fair return on their own saving. the law, distort investment and consump- • Effi ciency requires that programs should tion choices, and boost administrative and operate with as little waste or distortion of enforcement costs. behavior as possible. Clearly, simplifi cation is among the most • Simplicity and transparency complement slighted tax principles. Joel Slemrod of the the fi rst four principles. University of Michigan estimates that the These principles sometimes clash. A com- value of time spent on fi ling income tax mon place of confl ict is the nexus between returns alone is equal to about 10 percent of progressivity and individual equity, since tak- the total income from tax collections. This ing from A, a person with means, to give to B, tax tithe is no argument for stripping every a person with needs, typically also denies A preference from the tax code – some do serve some of the rewards of his or her own work. defensible social purposes. However, there is But such confl icts don’t explain how far we’ve little excuse for the inequity, ineffi ciency and strayed from the righteous path. The tax sys- complexity associated with, say, the alterna- tem is rife with examples in which one princi- tive minimum tax, or the layers upon layers ple is violated without furthering another. of savings subsidies, child credits and allow- ances, capital gains tax rates and energy and retreat from budget principles environmental subsidies. This morass has Improving tax policy requires at least some formed because both major political parties modicum of budget discipline. Unfortunate- have all but abandoned traditional tax reform ly, that’s pretty much disappeared, too. Per- principles. haps the most troublesome transgression is Does anyone even remember what those the way Washington is effectively restricting principles are? Here’s a quick reminder: future budget choices. • Equal justice, or “horizontal equity,” asserts The name of the game in Washington and 22 The Milken Institute Review most state capitals these days is to spend the money before somebody else does. And that means spending not just today’s rev- enues, but tomorrow’s as well. Throughout most of the nation’s his- tory, Congress avoided budget deci- sions that dug an enduring hole. Indeed, except in wartime, eco- nomic growth prompted suffi - cient growth in revenue to cover temporary defi cits created by high- er discretionary spending. Thus, even careless spending, or tax-cutting, did not perpetuate future defi cits.
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