Politicians love nothing more than telling people what to do. Hearts warm in the Capitol any time a new bill is dropped in the hopper prohibiting something or expending taxpayer funds in service of the latest trendy cause. Sometimes, instead of direct spending, lawmakers tack new provisions onto the tax code as a means of manipulating public behavior. In a report released Monday, the Government Accountability Office (GAO) calculated Congress has created $1 trillion worth of such tax code gimmicks.
This is why the Internal Revenue Service (IRS) forms Americans dutifully fill out by April 15 are a confounding maze of exclusions, exemptions, deductions, credits, preferential tax rates and deferrals. One-by-one, the additions to the tax code are carefully tailored to meet the needs of particular groups, or in some cases, highly favored individuals. When it’s all combined together, it becomes a mess requiring 73,000 pages worth of the Federal Register and IRS documents to explain it all. Life would be much simpler if officeholders trusted the market to work on its own.
As the GAO points out, each tax-code benefit carries a price tag. “Getting more of something means giving up something else,” the auditors noted. “Often, private markets can produce outcomes that are considered economically efficient. Self-interest is assumed to motivate buyers and sellers to ensure that resources are used where they produce the greatest value.” By creating tax-code loopholes, lawmakers are essentially saying they’re smarter than the market.
In this case, Rep. John Lewis, Georgia Democrat, and Rep. Lloyd Doggett, Texas Democrat, asked the government watchdog agency to investigate “tax expenditures,” and the GAO dutifully complied. Only in Washington could allowing people to keep more of the money they earned be considered spending. Letting people hold onto as much of their cash as possible is commendable, but doing so through selective credits and deductions is a terrible way to accomplish public policy goals.
Take the array of tax benefits offered to help defray the growing cost of a college education. Because of the bewildering maze of eligibility rules that govern the process, GAO found families rarely maximized the savings available to them. The families that do make the most of the system wind up passing the cost on to others struggling to make ends meet. That’s because when a deduction is introduced, the tax rate for everyone else needs to rise if the government is to maintain the same level of revenue. A special perk for one person means higher payments for everyone else.
This suggests an ideal solution to make the system fairer for all: Jettison every special-interest deduction and replace the code with a simple, flat tax rate or perhaps even a consumption tax. The idea gains little traction inside the Beltway since adoption requires Congress to relinquish its power to manipulate the public. As the country digs itself deeper into the fiscal hole, however, tax reform may be America’s last, best hope to revitalize the market and restore our economic growth.
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'Your papers, please' must never be heard in America
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