Tuesday, November 29, 2011

Let's Have a Jubilee Year for the Tax Code

The federal tax code in this country has some problems. It's inefficient. It's regressive. It reduces national competitiveness (high corporate tax rates). It's out of touch, rewarding old industries and technologies while inhibiting innovation. It punishes productive behavior (income) while rewarding less productive behavior (renting real estate) and sometimes arbitrarily shifting economic activity from one thing to the other (buying bonds over stock, or purchasing health care through employers). It's also insanely complicated. Decades of new laws granting tax credits, exemptions, or special rates have narrowed the tax base and reduced revenues. On a sort of meta-level this complexity has increased the tax code's regressivity: richer taxpayers can afford accountants that navigate the arcane landscape of loopholes and deductions, effectively lowering their tax liability.

Of course, all this is nothing new. Washington has been talking about simplifying the tax code for decades. Yet legislators continually compound the problem by passing new tax credits and exemptions for particular groups at a steady pace. If you're in Congress and want to help out a certain group (demographic population, interest group, whatever) why take the heat in next year's election for creating a new Washington spending program (with all it's bureaucratic inefficiency) when you can simply add a targeted tax credit?

It is an unavoidable pattern that over time, democracies will add more laws than they repeal. Elected officials' legacies are measured in no small part by what sorts of new institutional commitments they get passed and implemented. A good example is George W. Bush creating the Department of Homeland Security. A more mundane, yet still significant example is President Obama adding a daily economic briefing to the existing national security morning briefing. The point is that keeping the status quo tends to be easier than changing it, and even though passing laws is difficult in our political system, once a law is passed it tends to stick around. How long will it be until a President receives a daily environmental briefing on top of the other two? Jonathan Rauch, in his aptly titled book Demosclerosis, explores this phenomenon and how it has contributed to a gradual calcification of our government, especially the tax code. Each tiny little tax credit is defended vigorously by the narrow group that benefits most from its continued existence, thus nobody wants to start a fight over something so insignificant in the scheme of things.

So what can we do about this incremental malaise? Obviously, passing some good tax reform laws would help tremendously. It's probably within the realm of possibility that sometime in the near future Democrats and Republicans will come together and make the technocratic fixes we've all heard about, broadening the tax base by eliminating worthless tax credits, reducing rates and increasing revenues and all that. But no matter how good a one-off fix might be, it still fails to address the deeper structural and institutional forces that push the tax code to become increasingly sclerotic, calcified, and complicated over time. So here's my thought: why try to fix them at all?

It's pretty clear that some things in Washington just wont change, and the ratchet of inefficiency is one of them. Lawmakers will always try to get reelected, reward particular groups, and establish a legacy of accomplishments. So what we really need is some sort of reform that channels these inner demons of our democracy into something good--or at the very least manages them. So I propose applying an idea that's been around for quite some time to the problem of our tax code: the Jubilee Year.

In biblical times, the kingdoms of Israel and Judah observed a tradition whereby every fifty years, a special "Jubilee Year" compelled a universal remission of sins, debts and prison terms for households and individuals. The practice was later picked up and formalized by Christians in 1300 under Pope Boniface VIII. Since then, symbolic festivities have replaced the original economic and political basis for the cyclical tradition.

The central idea of the Jubilee Year--a periodic wiping clean of economic and political commitments--is exactly what our tax code needs. Every fifty years, the federal tax code should scrub clean and revert to some minimal and simple core, wiping away all the special deductions, credits, loopholes, and targeted rules that have accumulated. After each Jubilee Year, legislators can get right back on with their business of rewarding interest groups and establishing a legacy, now with the added comfort of knowing that their policies aren't contributing to the long-term problem of bureaucratic inefficiency and loss of government dynamism. With good implementation and a little bit of luck, a Jubilee Year for the tax code might just stave of institutional senility for years to come.

1 comment:

  1. Simple and elegant, and therefore perhaps doable! Nice turns of phrase here: "incremental malaise, ratchet of inefficiency."