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Want lasting tax reform? Shrink government
By W. James Antle III
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 George W. 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 A national sales tax would only be beneficial if the 16th Amendment authorizing a federal income tax was repealed and future income taxes banned.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.
We can have tax reform that includes an end to the IRS and greatly reduced taxes. But this is attainable only if we lessen Washington's reach. If you want to file your taxes on a form the size of a postcard, then you need a government with a list of powers closer to the size of the Constitution.
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