Magazine article Insight on the News

A Twofold Way to Solve America's Tax Code Mess

Magazine article Insight on the News

A Twofold Way to Solve America's Tax Code Mess

Article excerpt

When President Reagan persuaded Congress to pass the Tax Reform Act of 1986, he pulled off a near-miracle and clearly enhanced his reputation as the Great Communicator. That reform dramatically reduced the maximum marginal tax rate paid by individuals from 50 percent to 33 percent.

In addition -- by sweeping away many loopholes, special tax breaks, deductions and tax credits -- the new law dramatically simplified and made more transparent the entire tax system. For nearly 100 million taxpayers, the year 1986 was indeed an annus mirabilis.

The great 1986 reform was, of course, less than perfect. Indeed, even that simplified system would challenge the understanding and ingenuity of the most able rocket scientists. While a massive improvement, the more than 1,000-page Tax Reform Act was still riddled with loopholes and preferences for chicken coop and pigpen investors, reindeer hunters, tuxedo-rental firms and so on.

After reviewing the seemingly infinite number of provisions that send us careening around the byroads of the tax code, we wonder how on earth it evolved into such a mess. Probably no one set out to turn the tax code into a crazy maze. But each faction or interest group secures its own tax loophole, and each chink produces side effects, which the tax writers try to offset with additional provisions. So, like a cancer, the tax code grows, spreads and debilitates the economy.

The reason for this insane complexity is simple: Politicians need money to win reelection. The factions and interest groups have the money and want the loopholes. The politicians "sell" the loopholes to the factions in order to build their reelection war chests.

This is congressional business as usual. What was so unusual in 1986 was the broad agreement to trade in loopholes and preferences in exchange for a simplified system with much lower rates of taxation. One important explanation was that by the early 1980s, our Gruyere form of the tax code was patently absurd and seen to be so by the oh-so-patient taxpayers. Nevertheless, great credit goes to the Reagan administration for maneuvering tax reform through Congress.

As economist Milton Friedman remarked at the time, it could not last. Indeed, new loopholes, albeit small ones, soon began to appear. The dam began to break with President Bush's tax U-turn, and President Clinton's budget merely develops much further the principles, if that is the right word, followed by Bush. …

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