Is there such a thing as a bad tax cut? Well, yeah, particularly if it distorts the natural market. Referring to the American Jobs Creation Act of 2004,
How much will this all cost? The bill’s sponsors claim it will cost the Treasury nothing. For every tax dollar given away—around 140 billion of them, in all—another will be clawed back, they say. The bill does close some loopholes and tear down some tax shelters. Many of the giveaways are also supposed to be temporary. But tax cuts, even ones with expiration dates, rarely die—some enterprising politician usually finds a way to make them permanent. Assuming that happens this time, the bill will only add to America’s fiscal difficulties.Now, I don't believe tax cuts "cost" anything. The money doesn't belong to the government, it belongs to us, so a tax cut isn't an expenditure. I think the whole first paragraph there is fluff, but I quoted it for context because I think the second paragraph is important. The distortions created by our tax structure are bad for our liberty and bad for our economy. (And that includes things like the child tax credit, the mortgage interest deduction, and the charitable donation deduction.) What we need is not just a cut in taxes, but a vast simplification of the tax structure, which is one major reason I'm in favor of either a flat tax or a national sales tax.Those fiscal problems are making many economists uneasy. But not all are as fatalistic as Mr Buiter. Indeed, some still hope for fundamental tax reform in the United States. For them, the true burden of taxation is not the money it levies but the economic decisions it distorts: decisions to work, save and invest. They hold up the tax reform Ronald Reagan passed in 1986 as an example of how to broaden and streamline the tax code, removing its distortions and freeing it from special interests.
Michael, I know it isn't obvious, but there's a contradiction between these two statements.
"The distortions created by our tax structure are bad for our liberty and bad for our economy."
"What we need is not just a cut in taxes, but a vast simplification of the tax structure"
The underlying assumption is that a simpler tax system is fairer. But that's just not true. In just about any area of law, simple things are less fair.
Consider criminal law. Trial by combat and trial by ordeal were simple, but they weren't fair. Our modern criminal justice system is very complicated, but far more fair.
Income is a complicated idea, and no hand-wringing by conservatives can change that fact. Every finite set of legal rules will leave borderline cases. As the economy grows, the number of borderline tax law cases grows with it until the Congress or IRS must establish new rules for them. But the rules to handle the borderline cases create new classes of borderline cases, and the process repeats. That's where the real bulk of tax law complexity comes from.
The core of this confusion is that people assume that preparing their personal 1040s with W2s attached give them some insight into the federal income tax. It doesn't. Most tax law deals with topics that most wage-earners rarely if ever have to think about, like charities, pension plans, depreciation schedules, corporate reorganizations, and partnership accounting. That's where you will find the real complexity and the real volume of verbiage. Pulling some pork out of the tax code won't significantly affect its size at all.
BB: I wasn't talking about fairness exactly, I was talking about market distortions. A simpler tax structure will allow markets to operate more naturally.
And, although I'm sure you know more about tax structures than I do, I find it very hard to believe that our current system is as lean and mean as possible.
"Income is a complicated idea, and no hand-wringing by conservatives can change that fact."
That's the kind of thinking that torks me off. I won't disagree with that statement, because it's true. I just wonder why it has to be so complicated.
What has to be so complicated about income? The governement doesn't earn it, I do. Therefore, they should do everything they can to simplify the process of taxing to make it fair and simple.
The problem is, they look at my money as if it is theirs to begin with. They're greedy. That's why income has to be so darned complicated- to them. If people weren't treated like cattle, and had a fair taxing system that they really felt good about, I don't think revenue for the government would be an issue at all.
MW: I should have been clearer. I'm defining tax fairness as minimum economic distortion. That's always the starting point for serious tax discussion. Politicians can talk about progressive tax rates as tax fairness, but that's really in the realm of public policy and outside of tax law. Within tax law, it doesn't really matter what the tax rates are. The question is: How you define income?
I'm not arguing that our tax system is ideal. It certainly allows some distortions. You listed a few. It's just that there is no relationship between the amount of distortion and the number of words required to describe the system. The intentional distortions really don't take that many words to describe. It's preventing the unintentional distortions that generates the verbiage.
JP: Here is an analogy: My vocabulary for colors is about two dozen words. Buy a box of two dozen crayons, and those are the words I can confidently use to describe colors.
My daughter is into graphic design. She can have long conversations on whether the wall paint is cream, ivory, or eggshell. She can probably identify about five times as many colors as I can.
And I bet that if you talked color with someone who works with it professionally, they have all sorts of color words that even my daughter doesn't know. They don't just segment the spectrum; they also talk in terms of saturation, brightness, and something about temperature.
Why do the professionals make color so complicated? Why can't they stick to the standard 24 crayons? That's just the nature of knowledge. The more intellectual pressure you put on a topic, the more complicated it becomes. Put anything under a powerful enough microscope, and straight lines always turn into more complex shapes.
With tax law, consider that we're talking about a single book (about 4" thick) that provides a taxation answer (and usually a good answer) for every economic transaction that takes place inside the United States. That's a lot of pressure! People do all sorts of crazy and complex economic deals in this country, and they're always trying to find a way to pay less tax. Periodically, they find flaws in the system and exploit them to create economic distortions. Then Congress or the IRS creates more rules to close the loophole and stop the distortion. And the tax law grows.
I'm all in favor of eliminating economic distortions and lowering tax rates. But trust me, neither of those will shorten the tax code.
BB: Well, I trust you in general, it just sounds fishy to me. And frustrating.