I don’t disagree with Greg Mankiw’s notions of how our tax system should be redesigned which can, roughly, be summarized as:
- Replace the income tax with a value-added tax.
- Introduce Pigouvian taxes on “bads”, e.g. gas at the pump.
- Simplify!
Even if you acknowledge that those are the right things to do IMO the probability that we will do them is vanishingly small. Here’s what I think is more likely to happen:
- We’ll introduce a VAT on top of the income tax.
- We’ll exempt more people from the income tax and raise the rates on the highest earners.
- We won’t introduce a steep gas tax (the last guy to propose that was resoundingly defeated in his run for the presidency).
- We’ll make the system even more complicated that it is now.
I think there are two basic tools you should use in evaluating the likelihood of any particular policy actually happening. First, try drafting a campaign speech proposing it. If you can’t imagine any politician doing that, if the candidates who’ve proposed it have been defeated, and, particularly, if you find it much, much easier to write the campaign speech attacking the proposal, it ain’t gonna happen. Second, check whether it a) puts more money in the politicians’ pockets or b) gives politicians more power. There are really only two reasons to seek political office: rent-seeking and the desire for power. If the policy doesn’t do one, the other, or both, it’s not likely to be enacted into law.
A VAT in the absence of an income tax reduces political influence over raising revenue; a VAT on top of an income tax increases it and provides more money to boot. A complicated system provides more political influence over raising revenue than a simple one would and provides plenty of cracks for money to fall through. That’s why we’re so overdue for tax reform. On average we engage in major tax reform every twenty or so years. It’s been nearly thirty.
Which is the set of solutions going forward for our problems is the empty set. You can’t win by raising taxes, even if you simplify things and make the tax code less burdensome from the perspective of efficiency losses. You can’t win by taxing bad things as those are often things people want. Even simplifying will gore some people’s oxen (tax lawyers, tax preparers, the computer programmers who make Turbo Tax, etc.) and they will shift money to your opponent. Politicians want to win above all else. So they wont want to do any of the above no matter how much sense they make.
As a person who does forecasting as one of his primary job duties I well understand using the past to try and predict the future. Problem is it doesn’t always have to work out like it did in the past. We have had 3 recessions now in a row where job growth following the recession has been anemic. In fact, it has probably gotten more anemic over time. In the past, after a recession we’d see a significant bounce back. So, have we had a shift in the economy that makes such bounce backs very unlikely? Or are the last three recessions unique and the next recession will return to the historical norm?
TL;DR: We may have had major tax reforms every 20 years or so, but there is nothing suggesting we’ll get the like again. We might, but it isn’t a sure thing.
I don’t think he’s calling for anything like a V.A.T. given this line:
Indeed, Mankiw is for progressive taxation (vs. a regressive V.A.T.) because of the advantages held and granted by the government to owners of property. (He’s not for redistribution though).
A VAT does not have to be regressive.
I would disagree on the simplification part. I think there is substantial support across the aisle for simplification (just recently met with my Congressman). I think the issue that will hold it up is the actual tax rates and how progressive they should be, if at all. But, TBH, I cannot see the current Congress working with any president on tax reform.
Steve
Congressmen will TALK about the desire to simplfy the tax code, but they know THEIR bread and butter is in keeping the thing as fuck-all complex as possible. That is, your congressman was lying to your face.
I’m afraid I find ice pick spot on here. Politicians simply are not in the business of giving up clout that might get them re-elected.
Vote for a small govt pol at every opportunity……and pray. If they do the right thing they will be a 1-2 termer best. Than the slime factor sets in.
I understand the cynicism, but simplification has happened before. By this same standard, I know that cutting spending means losing votes. We will therefore never cut spending. Vote for the guy willing to raise taxes if you want to cut our debt.
Steve
Simplification in one part of the code is usually followed soon thereafter with complications elsewhere. Things like COBRA and HIPAA and ERISA and PPA don’t always get thought of as tax legislation, but that’s what they are, at least in part. (As was the so-called Obamacare legislation, whose initials I forget – PPACA, that’s it.) The devil is in the details, and the details are almost always well hidden from view.
Yes, Ice is right, no real solution is possible so long as politicians love their power. In fact I’d argue that one of the necessary conditions for dealing some of our problems is having politicians not coveting power. Since that is extremely unlikely, the game is already lost.