- The Washington Times - Monday, June 9, 2003

As the pundits examine the details of the president’s tax-cut victory and pronounce it lacking in various ways,

perhaps they should step back and reflect on just why tax cuts, even more than most legislation, tend to be hodge-podge measures and not slim packages with overarching themes. Maybe they will come to the sensible conclusion that the next time Congress embarks on reforming the tax code, the bill writers should start by agreeing on first principles and resolve to keep the interests at bay.

• Target revenue, not social goals. Tax revenue should be raised to support government. Using the tax code to achieve social objectives such as helping hard-hit industries and workers may be nice in theory, but in practice has led to waste and abuse. The present system is filled with massive giveaways to business and the wealthy. Such “tax expenditures” amount to tens of billions of dollars per year. Better to target social goals with spending.

• Score tax changes correctly. From grade school, we know algebra is more complicated than arithmetic. But algebra is required here.

If you increase a tax rate on something, you get less of it. You wouldn’t expect to get 10 percent more revenue from taxpayers by increasing tax rates 10 percent anymore than you’d expect to get 10 percent more revenue from car sales by increasing car prices 10 percent. As a recent example, the 10 percent luxury tax on yachts imposed in 1990 produced less money than it cost to collect, caused substantial unemployment, and drove many companies out of businesses. The green eyeshade types should use “dynamic scoring” rather than “static scoring.”

c Minimize costs to the economy. There are “collection costs.” The Tax Foundation estimates that 20 cents in real resources are consumed in collecting each dollar for Uncle Sam. Most of this cost is paperwork — keeping records, filling out forms and filing with the IRS. This is money down the drain. There are “avoidance costs” — where people go to great (legal) ends to minimize their tax liabilities. What if all the talent now used in setting up tax shelters and the like were applied to producing real goods and services, and what if pay to corporate executives were driven by performance instead of tax advantages? Finally, there are “growth costs.”

Our tax code is substantially biased toward consumption and against saving/investment. We rationally tend toward what’s in it for us today, and damn tomorrow. As a result, the economy grows more slowly than it would if taxes weren’t so biased.

Make it transparent and fair. We all ought to understand what we’re paying in taxes and why. Most of us think federal taxes means income taxes.

But payroll taxes (Social Security, Medicare, and the like) are nearly as large (40 percent vs. 44 percent of taxes collected). The remaining 16 percent consists primarily of excise and corporate taxes — which, of course, people pay in the end. Polls indicate an appalling lack of knowledge about what taxes people actually pay (they typically underestimate them).

People should not stand in fear of the IRS — because the tax code is so complicated not even the experts can agree on who owes what, when. Taxes should be levied fairly. They should be paid once — on income as it is earned, not on wealth as it is accumulated. People who earn the same income should pay the same tax. Also, taxes should go up with income: a “flat” rate on income (such as 15 percent) would qualify, as would a “progressive” rate (such as a scale that slides up from 10 percent to 40 percent).

Tie taxes to the cost of government. Most of us know that if prices are set lower than costs we purchase too much and producers supply too little. If prices are set higher than costs, supply outruns demand. Market discipline is no less important when it comes to government. When people see the cost of government as artificially low, they demand too much of it (and vote for representatives who promise more). When they see the cost of government as artificially high, they demand too little.

There are obvious conflicts in applying these principles — otherwise, we would have less controversy over where to go next. But coming up with a tax code that meets them in general may not be as difficult as you would think. A simple, flat tax on income or sales would go a long way, and though not nearly as ambitious, the president’s tax cut was a significant step in the right direction.

Surely our elected representatives can make the tax code simpler, fairer, and far more efficient. Agreeing first on broad principles and then reasoning together over details will be the key.

James C. Miller III is chairman of the CapAnalysis Group LLC and served as President Reagan’s budget director, 1985-1988.

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