What We Need To Do Is Send the Tax Reformers On a Long Vacation

Interest in amending the Internal Revenue Code is rising once again, and the pressures are bipartisan.

Conservatives advocate cutting--or better, eliminating--the tax on capital gains as a key to reduce tax burdens. Many contend that such a reduction in rates would pay for itself in the form of higher levels of economic activity and hence of tax collections, although the point remains controversial among tax experts. In any event, reducing marginal tax rates on income is always inherently attractive to those who pay the taxes.

Liberals, in contrast, are mounting an effort to raise taxes in response to various motives. Some want to accelerate the flow of revenue into the Treasury to reduce record U.S. budget deficits. Others pursue an aim of greater equity or “fairness,” wishing to raise the rates on high-income individuals. Others look for ways to fund an “action plan” to cut taxes for “working Americans” as a way of fighting the recession.

Of course, it is loads of fun to talk about the virtue of lower taxes, especially if the revenue loss were to be offset by higher fiscal exactions on other people. I prefer not to join either chorus. Rather, my suggestion is to give the federal tax writers an extended vacation.

In the words of Rep. Dan Rostenkowski, the experienced chairman of the Ways and Means Committee, “The practice of annually rewriting the tax code imposes a tremendous burden and creates tremendous uncertainty.” The chairman of the key committee on tax legislation is absolutely right. There are costs as well as benefits that arise from the most carefully crafted revisions in revenue legislation.

During the past decade, private investment and business planning have suffered from an almost endless array of changes in the tax ground rules. For example, rather generous tax incentives were enacted to encourage home-building and office construction. Then these incentives were suddenly reduced or eliminated. Not too surprisingly, this start-and-stop approach to government policy has led to a feast-and-famine cycle in housing and office building.

A few years of stability in the federal tax system would be most welcome. That also would give the IRS the time to complete the mammoth task of writing all the regulations needed to implement the many changes in the tax laws that have been enacted in recent years.

As for increasing taxes to finance an anti-recession program, such action constitutes what we can call a “ cynical leading indicator.” At least in many past business cycles, by the time Congress gets ready to pass a jobs bill or other pump-priming legislation, you can count on the economy already having hit bottom and a recovery being in the offing.

A practical point needs to be taken into account by the enthusiasts for another round of tax reforms. Congress rarely enacts a “clean” tax bill. The invariably complicated revenue statute may start off as a simple proposal to raise (or lower) federal tax rates, but the legislative process results in all sorts of “logrolling” amendments.

We can recall the experience with the Tax Reform Act of 1986. That statute was touted as a major loophole closer. Nevertheless, it contained a special benefit for the “state which ratified the United States Constitution on May 29, 1790,” and another goody for “a university established by charter granted by King George II of England on October 31, 1754.” It seems appropriate to take a “plague on both your houses” approach to the many suggestions to change the tax laws. The preoccupation with the revenue side of the federal budget on the part of Republicans and Democrats, liberals and conservatives, is misguided. The true unfinished business in federal finance is on the expenditure side of the budget.

There is no shortage of candidates for the budget ax. Merely examine the numerous programs enacted in the 1930s that have outlived their usefulness but continue to drain the Treasury. Then consider the many large subsidies to well-off citizens, and finally, take a look at the generous aid to foreign governments.

It is a lot more fun to play tax reformer than to do the hard work required to cut budgets. And, yes, I would love to see my marginal tax rate decline. Indeed, this economist, like most citizens, has his private agenda for reducing tax .burdens. But the national preoccupation with the revenue side of the budget has led the United States to annual budget deficits in the range of $300 billion, and that is a rough and undesirable neighborhood for a nation to live in.