Arnold Kling  

Tax Reform Timidity

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The New York Times' Daniel Altman describes the state of the income tax code.


Washington managed to hack through much of the underbrush of the tax code in an overhaul that President Ronald Reagan signed into law in 1986. But in the years after, lawmakers started adding dozens of provisions to the individual and corporate income tax systems, contributing to their complexity and helping the tax preparation industry grow into an even larger business.

Alberto Alesina and Francesco Giavazzi argue that liberalization has to be a "big bang" process, because incremental reforms are blocked by interest group politics, as public choice theory predicts.

because overprotected minorities enjoy privileged access to politicians, it is no surprise that deregulation incites so much fierce--and effective--opposition...


Is there a way to weaken this opposition? What if a government, instead ... unleashed an economic "big bang," trying to liberalize most markets at once?


Broad-based reforms, such as NAFTA, the 1986 tax reform program, and the commission to close military bases, are more effective than narrow measures. Piecemeal proposals mobilize the opposition of narrow interest groups. It is easier to neutralize such opposition with "big bang" approaches.
In this interview, CEA Chairman Glenn Hubbard talks about the context for the proposal to eliminate double taxation of dividends.

This wasn't a big picture discussion of tax reform, it was a response to perceived weaknesses in investment in the economy now.

For discussion: Is the dividend tax cut proposal enough of a "big bang" to capture broad public support, or will it become a special interest "Christmas tree" on the way to passage?


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COMMENTS (2 to date)
Sean Hackbarth writes:

Unfortunately it will get seriously modified. When even GOP Senators are getting the willys, then there's a problem. It's a great idea, but with Bush focusing on the war in Iraq, attention and political capital will not be spent to get the plan passed "as is."

Jim Glass writes:

The dividend cut is a very little "pop".

I've watched the Congressional tax writing committees professionally for 20-odd years now. (And if you want a group that would make Bismark's sausage makers blanch, that's them.) My impression is that Bush isn't really doing anything serious at all on taxes this year, or even on the budget generally. And with good reason -- he's preparing for a war, and that really is much more important and more time sensitive too, so first things first.

Of course, the Administration has to propose *something* on taxes each year as a political necessity, and for Republicans that means a proposal to cut something. They ran down the list of usual suspects like a capital gains cut and dismissed them for political reasons. Then they got to Hubbard's old proposal for dividend tax reform and decided that looked good on the economics and poltically too -- because marginal voters these days tend to be investors and an extra deduction on the tax return for them from Republicans is a nice thing to have in their memories on election day.

But there's no evidence that Bush is doing any leaning on anybody in Congress at all to get what he wants through. And a President who really wants to get something through Congress *always* has to do some serious leaning on key Congresspeople to get it, because otherwise they show an insitutional mind of their own.

IOW, this year's tax proposals are just a part of the political "permanent campaign" we now all enjoy. If the war goes well, next year the Bush people may get serious on fiscal policy with Congress. If it doesn't, they'll have other concerns next year too.

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