Source: Mauldin Economics
“Taxation is the price we pay for failing to build a civilized society.”
– Mark Skousen
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
– Ronald Reagan
Taxation is almost never an exciting subject, nor do we want it to be. The best tax system would be silent and unobtrusive. It would raise enough revenue to cover essential government functions and not a penny more. Sadly, our US system is nowhere near the ideal.
In part one of this series, I talked about whether the new tax proposals would actually create jobs and discussed the proposed “Border Adjustment Tax” and some of its possible complications. In part two, today, we will look more closely at the rest of the tax proposals. Then next week we will go much deeper into the BAT and then into what I think the tax system should actually look like, which will be far different from anything I’ve suggested in the past. That discussion will make more sense if we have placed the ideas in full context. That is today’s objective.
The BAT is not a stand-alone policy. It is one component of a broader House Republican tax reform plan, which in turn is part of an even broader federal government reform proposal called “A Better Way.” In theory, the different parts all work together, which is good but makes it hard to discuss any one element in isolation.
In this series, I’m looking specifically at the tax-reform portion of the Better Way proposal. It has other planks on national security, health care, poverty, and more. They are important, and I may discuss them in the future, but let’s leave them aside for now.
I must also note that I am not a CPA or any other sort of tax expert, and you should not make any financial or tax decisions based on what I say here. Please consult your own tax advisor for individual advice.
With those caveats, we’ll look at why we need tax reform and how the Better Way plan tries to deliver it. I want to say up front that I respect the plan’s authors for taking on this very difficult task. As you’ll see, though, I foresee major problems with some of their proposals. I hope they’ll take my criticism constructively and modify the plans to work better for everyone.
I will begin with an assumption I know some readers will resist: Government is necessary. Some of my friends and readers are anarchists, libertarians, or otherwise believe that government is inherently evil or counterproductive. I respect your sincerity, but I disagree.
Now, this is not to say that we need as much government as currently exists, or that everything governments do is useful. A great deal of it is not. Nevertheless, I believe we need some level of government to maintain civilization. That means we have to pay for the things government does. Hence, we have taxes.
The goal of tax policy should be simple: raise the necessary revenue to pay for whatever government actually, minimally needs to do. And government should do those things as fairly and neutrally as possible. Is that what happens? No.
We use tax policy to reward certain behaviors and/or interest groups while discouraging or punishing others. Using the tax code in this way is somewhat like using a baseball bat for heart surgery: It’s a blunt instrument, and not everyone will like the result. Nevertheless, that is what we do.
The outcome, over years and decades of incremental amendments and exceptions, is that we now have a system that no one fully understands, one that creates all manner of twisted, counterproductive incentives. Large parts of our economy, indeed entire industries, exist only because the tax system makes them profitable. Others don’t exist because the tax system makes them unrewarding.
Why do we tolerate this? Because, as much as we complain about the tax system, we all get something out of it. Virtually everyone has a vested interest in keeping some part of the current system intact. We also fear that any change will only make taxes worse – a perfectly rational fear, too. These concerns make change difficult.