THE BLOG
12/10/2014 11:38 am ET Updated Feb 09, 2015

Government, Not Taxes, Should Set Our Priority

Until we decide what we want government to do, "tax reform" will merely shift the tax burden from those who can afford expensive lobbyists to those who can't. One result will be a more complex and inefficient tax code that cannot be administered by the IRS because of deliberate cuts to its budget. Other results will be increasing disparities in wealth, increasing social unrest, and increasing shifting of taxes from multinational corporations to domestic companies.

Everyone agrees that a simpler and fairer tax code would help the economy, but it's impossible to achieve without clear goals. Right now the tax code is Congress's favorite way to pick winners and losers (something it is ill equipped to do) because the public is unlikely to understand tax subsidies and how they are allocated. The classic example is the current push for "territorial taxation," under which multinational corporations will never have to pay U.S. taxes on income they claim they earned abroad, giving them a huge competitive advantage over domestic companies against whom they compete. It's no surprise that Ways and Means is the most popular committee in Congress, not because the members are so interested in the intricacies of the tax code, but because it is the best fund-raising committee.

Congress's focus on cutting taxes rather than setting out a clear vision of what government should do has ended in some truly disastrous results. Everyone says they want a strong defense, but sequestration has eviscerated many key military programs because the discussion focused on cutting taxes without any real consideration of the consequences. Everyone says they want to cut waste in the government, but we have about 97 different anti-poverty programs, many of which could be combined and made more efficient and effective, but they can't because the committees in Congress refuse to give up jurisdiction over their pet programs. So, instead of making the programs more effective, Congress tries to solve the problem by cutting taxes so the programs can't be funded properly, which leads to more waste.

Both parties need to refocus their attention on what role government should play and only then formulate tax policy to fund those activities. Our current auction system of tax breaks needs to end.

Now that the Republicans will control both houses of Congress they need to define the role they think government should fulfill and only then develop the least economically disruptive tax system to fund those activities. Otherwise we will have a continuation of the battle over "extenders," which subsidize certain beneficiaries without any provision for offsetting their cost or discussion of whether they are cost effective.

From Tax Notes, December 8, 2014, p. 1168